Kewltech’s Technical Trading Blog
Course
Technical Analysis. The only way to trade. Focusing primarily on
S&P E-Mini. With some stocks to demonstrate proper use of
technical analysis of the markets. The charts and comments herein
are based out of my technical analysis. Trade at your own
risk. ISSN 2153-6295 © 2009-2013
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How To Learn: First watch the 4 videos (see below) as they are
examples of how people trade Kewltech style. This first video in
this series gives a general idea of the the technique used. Videos 24 go into more detail, and provide more examples. Then go through
the Kewltech Summary Course (it's towards the end of this epub Modules 1-4), and then go through Kewltech's actual issues (1-89
+ Spaztiks' issues 1-6). For more information & conversation
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Introduction
Markets moves from support lost to support gained and vice versa. Watch
how markets react to levels. In every single time frame. Learn to put the
time frames together. Learning momentum, distribution, accumulation, legs,
proper support and resistances are key. You'll get the hang of it if you are
persistent :)
Issue 1/89 – Cycles
Kewltech is going circle of life thing. Cue the music Elton! NOT!
As you can see, I really only use 2 oscillators. I used to use RS Wilder but
essentially it took too much chart space and became obsolete. Well, not
obsolete, but redundant.
What are oscillators used for?
Generally, they are momentum indicators. They also tell you when
something is overbought or oversold. Some people use them to tell them
when to buy and sell. There are a host of indicators and I've never aimed to
use them all. I became well acquainted with 2 indicators and those are my
MACD and Slow Stochastic.
MACD StockCharts.com Definition - Developed by Gerald Appel,
Moving Average Convergence/Divergence is one of the simplest and most
reliable indicators available. MACD uses moving averages, which are
lagging indicators, to include some trend-following characteristics. These
lagging indicators are turned into a momentum oscillator by subtracting the
longer moving average from the shorter moving average. The resulting plot
forms a line that oscillates above and below zero, without any upper or lower
limits. MACD centered oscillators apply.
As a momentum indicator, MACD has the ability to foreshadow moves in
the underlying security. MACD divergences can be key factors in predicting
a trend change. A Negative Divergence signals that bullish momentum is
waning, and there could be a potential change in trend from bullish to
bearish. This can serve as an alert for traders to take some profits in long
positions, or for aggressive traders to consider initiating a short position.
Stochastic Slow StockCharts.com Definition - Developed by George C.
Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator
that shows the location of the current close relative to the high/low range
over a set number of periods. Closing levels that are consistently near the top
of the range indicate accumulation (buying pressure) and those near the
bottom of the range indicate distribution (selling pressure).
I suggest you visit StockCharts.com and read up on these 2 old school
indicators.
These 2 indicators compliment each other. One is known as a lagging
indicator (MACD) and the other is known as leading indicator (Stochastic). I
think the term leading indicator is a bit of a stretch when it comes to
indicators. It is a matter of perspective and interpretation. Yadi yadi ya. To
use these indicators effectively, you have to understand the cycles they run.
Both of these indicators have 2 lines that crisscross each other. Both have
fast and slow lines. When the fast line is above the slow line, it is known to
be in POSITIVE DIVERGENCE. When the slow line is above the fast line,
it is known to be in NEGATIVE DIVERGENCE. At the point where the fast
and slow line meet, it is known to be in CONVERGENCE.
When I use the terms Positive and Negative Divergences. I only mean these
cycles and not the divergences between peaks as some are known to trade. It
is a matter of perspective and interpretation. Yadi yadi ya.
Cycle is always this:
Convergence -> Pos Divergence -> Convergence -> Neg Divergence ->
Convergence -> Pos Divergence -> Convergence -> Neg Divergence ... at
infinitum.
The MACD loops through these cycles in a generally cleaner fashion than
the stochastics. It is easier to discern the cyclic nature than the often-wild
frenzy of the stochastics. Regardless, the said cycles above are respected.
Price Action and Cycles
Imagine a clock. Imagine that these 2 oscillators actually travel in clean
circles. And the point of interest is the tip of the fast line of both oscillators.
Convergence is always at 9 o'clock. Price Action on Pos Divergence:
9 o'clock -> 12 o'clock pos price action
12 o'clock -> 3 o'clock neg price action
Convergence
Price Action on Neg Divergence:
9 o'clock -> 6 o'clock neg price action
6 o'clock -> 3 o'clock pos price action
Why do these cycles exist?
Simply they describe incoming volume. On pos divergence, generally the
bulk of volume coming in are bullish and then tapers off and becomes more
bearish cycling you to the next cycle of neg divergence. What do you mean
coming in? Well in order for these things to work, it needs input. The math
to produce the charts and the oscillators need input data. In this case volume
of orders for buy or sell. Knowing this, how can an oscillator or indicator be
leading if it relies only on data that has come in and doesn't actually
represent what will come in? It is a matter of perspective and interpretation.
Yadi yadi ya. LOL.
The cycles describe the incoming data. Hmmm…
Pos Divergence "generally the bulk of volume coming in are bullish" ...
"generally" meaning there is some bearish volume in there. Hmmm... Ergo
Neg Divergence should have some bullish volume too.
Oh that makes sense because this produces the range of the candles. And
even there is a rally there are moments of pause where we get a red candle
too. Oh!!
As mental midget would say..."Imagine that."
Take a few to digest the concepts above and then later on we will move on to
build on this. Elton... your turn.
Issue 2/89 – Accumulation
Accumulation StockCharts.com Definition - The act of buying more
shares of a security without causing the price to increase significantly. After
a decline, a stock may start to base and trade sideways for an extended
period. While this base builds, well-informed traders and investors may seek
to establish or increase existing long positions. In that case, the stock is said
to have come under accumulation.
I'm as plain Jane as can be. Boring old MACD. Boring old Stochastic. No
fancy indicator sets that can compare to Star Trek Level 3 Diagnostic in the
engineering room. Well don't include the original Star Trek of the 60's. Las
Vegas flashing lights is all they could do back then. Hello! But I digress.
When the market wants to pop up the price. It accumulates.
Doesn't matter if it will be a big move or a weee little one point move. It will
accumulate.
Mr. StockCharts.com says "... After a decline, a stock may start to base and
trade sideways...”
When do you usually see accumulation? After a decline.
What will you see? You should see the candles start to base and trade
sideways.
Very basic display of Accumulation. And exactly as Mr. StockCharts.com
defined it.
But Mr. Kewltech sir, the definition also states and I quote, "The act of
buying more shares of a security without causing the price to increase
significantly." How does that happen? How pray tell do you build up bullish
tones without causing the price to increase significantly?
How do you buy shares and not affect the price?
Why does one accumulate? The act of accumulating suggests that you were
from a state of deficiency. "After a decline, a stock may start to..." In order
to orchestrate a significant rise in price from your current state. You must
amass ... "The act of buying more shares of a security..."
Logic states that since there was a "decline", that there must have been a
massive influx of sellers. In order to offset the voluminous bear attack, the
initial phase of the bulls come back is to accumulate and nullify the bears
advantage. This act will not affect the price significantly because most of the
bullish volume will be absorbed to offset the bearish volume.
An accumulation is useless if it does not result in an uprising. As soon as the
bulls offset the bearish volume. They finally overcome the bears and drive
the price back up.
ACCU-CHING!!! LOL and I was told the funnymentalist tagged this stock
"over valued.” Funnymentals go out the door compared to techs.
Now knowing this. Could you attribute the security to move up in price
without you knowing it? It must be the news right (barring some unforeseen
catastrophic event)? You funny mentalist!
How can you tell this act of accumulation is working? It’s in the chart.
Issue 3/89 – Distribution
Distribution StockCharts.com Definition - The systematic selling of a
security without significantly affecting the price. After an advance, a stock
may start forming a top and trade sideways for an extended period. While
this top forms, a security's shares may experience distribution as wellinformed traders or investors seek to unload positions. A quiet distribution
period is usually subtle and not enough to put downward pressure on the
price. More aggressive distribution will likely put downward pressure on
prices.
When the market wants to drop the price, it must perform a distribution
process. You get peaks, double top, head and shoulders, are distribution
processes. There are only 2 mechanisms to move the market. Accumulation
to go up. Distribution to go down. It happens in tick charts, timed charts and
volume charts.
According to Mr. StockCharts, "After an advance, a stock may start forming
a top and trade sideways..."
When do distribution processes occur? After an advance...
What will you see? May start forming a top and trade sideways.
Mr. StockCharts.com is correct again with his definitions. In this tick chart
you see how well defined the sideways movements are to help you identify
the distribution process.
But Mr. Kewltech sir, the definition also states and I quote, "The systematic
selling of a security without significantly affecting the price. After an
advance, a stock may start forming a top and trade sideways for an extended
period." How do you sell without affecting the price significantly?
Distribution suggests that something is being dispersed. What is being
dispersed is bullish volume. "After an advance, a stock may start forming a
top and trade sideways..." In its place, an accumulation of bearish volume.
"The systematic selling of a security..."
In order to offset the bullish volume, the incoming bearish volume is
absorbed and thus the price is not significantly affected. Why is there a need
to offset the bullish volume? Because we just saw an advance in price.
Therefore a massive influx of bullish volume.
Until the break out where the volume of bears is able to overcome the
volume of bulls, we see the effects of distribution, thus lowering the price.
Accumulation and Distribution is the Ying Yang of the market. The market
cannot do anything without setting up these too primal mechanisms to move
the price up or down. Unless something catastrophic happens, the effects of
the news is always pre-staged. Somebody knew before the news was made
fully public.
Don't rely on the news to trade. Watch the technicals. Not funnymentals. It’s
in the chart.
Issue 4/89 - Falling Wedge
One of my favorite chart patterns is the wedge. There are 2 basic types of
wedges. And one of them is a Falling Wedge or a Bull Wedge.
The falling wedge is a bullish pattern that begins wide at the top and
contracts as prices move lower. This price action forms a cone that slopes
down as the reaction highs and reaction lows converge.
The falling wedge can also fit into the continuation category. As a
continuation pattern, the falling wedge will still slope down, but the slope
will be against the prevailing uptrend. As a reversal pattern, the falling
wedge slopes down and with the prevailing trend.
Regardless of the type (reversal or continuation), falling wedges are
regarded as bullish patterns.
FallingWedge StockCharts.com Definition - As price action travels down
a bull wedge, a high probability bull wedge actually sets up an accumulation.
This accumulation setup is why the pattern is said to be ... "The falling
wedge is a bullish pattern..." The other name "Bull Wedge" describes the
outcome. The pop in price expected to occur just before it reaches the apex
of the triangle. Generally the candles will travel 2/3rds of the wedge. It
should not reach the apex at all. A textbook return of a bull wedge should be
to the 2nd touch, approximately 1131.75 in the above example. A wedge is a
triangle. The falling wedge is a downward sloping wedge.
What do you mean by "high probability"? Do you mean Mr. Kewltech that
there will be times this will not work? As I suggested, a proper bull wedge is
an accumulation pattern. If the market is terribly bearish and the process of
accumulation, where the offsetting of the bearish volume fails, so will the
bull wedge attempt.
You may see that in a short timeframe you are looking to accumulate within
your wedge. However in an adjacent timeframe (i.e. 5min with 15min
adjacent), it is extremely bearish. There is a very good chance that bull
wedge will fail. A good signal to note that your wedge is going to fail, your
MACD in the higher adjacent timeframe and its higher adjacent timeframe is
strongly opposed to the move, like a wide open mouth of an alligator hungry
to eat your account capital. Do Not Feed The Animals!!
A great resource to visit for chart patterns, visit The Pattern Site.
It didn't fail because the Market Makers are personally targeting you.
Simply, the accumulation attempt was absorbed by a strong longer-term
trend. The longer-term trend is usually affecting its own distribution process.
And your short-term wedge cannot, technically, mathematically and
logically work against it. The bulls did not step up enough to make the
accumulation work. Keep things technical. Do not succumb to funnymentals
to explain why the market did what it did. Technical analysis is why you are
here. Keep things objective so you will not be a victim of analysis paralysis.
It’s in the chart.
Issue 5/89 - Rising Wedge
The second favorite chart pattern is the Rising Wedge or Bear Wedge.
Sibling of the Falling Wedge. These 2 basic chart patterns really represent
the basic cyclical waves that generally describe the movement of the market.
O boy I said waves. Not talking about Elliot Waves. Elliot Waves is a
different tool all together. But yes I did say waves. If you press the issue
hard enough, go into a lower timeframe chart, a 1min or even a 133/233-tick
chart. You should be able to draw, ever 1-3 candles, a series of bull wedge
then bear wedge on after the other.
Bull Wedge - Bear Wedge - Bull Wedge - Bear Wedge / Accu - Dist - Accu Dist ...
Rising Wedge StockCharts.com Definition - The rising wedge is a bearish
pattern that begins wide at the bottom and contracts as prices move higher
and the trading range narrows. In contrast to symmetrical triangles, which
have no definitive slope and no bullish or bearish bias, rising wedges
definitely slope up and have a bearish bias.
... As a continuation pattern, the rising wedge will still slope up, but the
slope will be against the prevailing downtrend. As a reversal pattern, the
rising wedge will slope up and with the prevailing trend. Regardless of the
type (reversal or continuation), rising wedges are bearish.
"The rising wedge is a bearish pattern...”
Well it’s going up? An upward sloping triangle. But it’s Bearish? Yeah isn't
that a bit of twist in your brain? Just before it reaches the apex of the wedge,
about 2/3rds, the price action dips. Ergo Bear Wedge. The name describes
the outcome. It is a distribution pattern. As the price travels up the channel,
an exhaustion of the bullish tones set in, and the distribution process takes
over near the apex of the wedge and the price drops accordingly.
What will hamper Rising Wedge?
If the longer term has set in motion its accumulation pattern and your wedge
is nowhere near the top of the push. Your rising wedge will fail. Longer-term
trends override shorter-term trend. Generally the market is really bullish in
all timeframes. The distribution fails to offset the bullish volume. You may
notice the candles looking toppy, but really it is basing again. You may have
a low point scalp to the down side, and even closing outside the wedge itself.
And then the candles will ride and almost hug the lower trend line of the
wedge, continuing its upward momentum.
The reason it failed. This chart shows that it was still bullish. See how in the
previous chart the candles hugged the bottom of the channel. This 4hr charts
shows that the bearish accumulation was not as drastic as in the 1hr; it was
absorbing much of it. Wedge fails.
Comparative Chart Analysis
Generally all chart patterns have a probability of failure. The astute trader
knows how to use his charts and compare long term vs. short term to derive
the actual outcome. The astute trader doesn't focus on how something will
fail. The astute trader looks for an opportunity that will work. Up or down.
The astute trader is not stuck on 1 chart and forms a strong bias based on that
one chart. It is through comparative analysis, that the probability of an
opportunity can be gauged to help you limit your risks.
Text Book vs. Actual
A word about chart patterns: The purist and inexperience will always look
for the textbook chart pattern. That isn't really a double bottom its weird and
skewed not like the picture at all. This is why people miss out on the
opportunity, they don't recognize potential. What is really happening? They
don't recognize how accumulation and distribution process can work. Ugly is
profitable. It’s in the chart.
Issue 6/89
Kewltech skipped this.
Issue 7/89 - Distribution Delayed
Distribution delayed and could be knocked out. How? Volume.
Big Boys are no show. A good volume day would start around 2 million.
Hardly getting 1.5 million. Technically, this can engineer what the analyst
projected for Feb 2010. 1200 here we come. Yes I used engineer. But since
they can't hide what they are doing, we can take advantage of whatever
happens.
The low volume has raised the price and has reset many of the short-term
momentum. But because it is low volume, in the longer term, the picture has
not changed much.
Potentially, this weekly rising wedge will fail. The reason is that it has not
displayed a large lost of bullish volume. It is flat.
Funny things happen when there is low volume. Not really funny,
technically correct. You can notice these things happen when you look at the
price action in your 1 min chart, when the price goes against your oscillators,
up becomes down and down becomes up. Oscillator cycle says down but
price goes up. What is really happening is that price action defaults to higher
trend ergo higher timeframe. So you look for where it is coming from and
you notice, the only one that is agreeing is your 15min or maybe your
hourly. And when that happens, the volume is really low. Market defaults to
following the true trend. Higher timeframes trend. Logically, if your bullish
volume is 2x more than the bearish volume overall, if the volume drops and
you drop even a penny to the bulls, then obviously the price will go up. If
you take out a penny, can you significantly affect the price? Can you
significantly offset the volume in your favor? No to both.
If you were trading Friday, you would have noticed how slow and how low
the volume was. And then near the end of the day, it pops up. Your key to
projecting the pop? The 15min chart. You had a flat MACD in generally all
of your lower timeframes. When this happens, you can't tell what is
accumulating or distributing. A flat MACD signals something big will
happen. It was your 15min MACD that was trending. Showing you how it
was building bullish momentum.
As you can see in this monthly, there is very little sign of weakness. Where
is distribution happening? In the daily, continuing to go higher and higher on
lower bullish volume. I wonder what that means?
Upcoming levels are from the 2003-2005.
Issue 8/89 - Support & Resistance
Support & Resistance StockCharts.com Definition - Support and
resistance represent key junctures where the forces of supply and demand
meet. In the financial markets, prices are driven by excessive supply (down)
and demand (up). Supply is synonymous with bearish, bears and selling.
Demand is synonymous with bullish, bulls and buying. These terms are used
interchangeably throughout this and other articles. As demand increases,
prices advance and as supply increases, prices decline. When supply and
demand are equal, prices move sideways as bulls and bears slug it out for
control.
"... where the forces of supply and demand meet."
OOOH! Skeery!! Sounds so ominous. Kinda gives me the willies.
This is Walter Cronkite. Bearing witness to this gruesome epic battle. Bulls
fighting Bears. It’s a gory sight indeed. Out gunned and out numbered, the
bulls have manage to temporary repel the scourge. Oh!! The filet mignon!
And this reporter, here at the 1136 price level, has failed miserably. I brought
the grill and the charcoal but I forgot the A1 sauce!! An epic shameful fail
indeed. "And that's the way it is."
Funny but true. Support and Resistance are price levels are sites of
accumulation and distribution. Supports are sites of accumulation.
Resistances are sites of distribution. Once support is lost, on the way back up
to that price, support becomes resistance. As resistance is passed, resistance
becomes support.
Support StockCharts.com Definition - A price level at which there is
sufficient demand for a stock to cause a halt in a downward trend and turn
the trend up. Support levels indicate the price at which most investors feel
that prices will move higher.
Resistance StockCharts.com Definition - Resistance is a price level at
which there is a large enough supply of a stock available to cause a halt in an
upward trend and turn the trend down. Resistance levels indicate the price at
which most investors feel that prices will move lower.
I love StockCharts.com's consistency in its definitions. It is why I love to
reference them.
Support is a “price level at which there is sufficient demand for a stock to
cause a halt in downward trend.” Goes well with Accumulation ... "...After a
decline, a stock may start to base and trade sideways for an extended period.
While this base builds..."
Resistance "...is a price level at which there is a large enough supply of a
stock available to cause a halt in an upward trend.” Goes well with
Distribution ... "...After an advance, a stock may start forming a top and
trade sideways for an extended period. ... distribution will likely put
downward pressure on prices."
The more a price is level is held as a support or a resistance, the stronger that
price level will act as support or resistance. When resistance levels are
gained or passed, it allows the price action to move upward. When support
levels are lost, it allows for the price to drop further.
In order for the trend to be technically reversed, it must first reclaim the
previous support lost. Which is now a resistance. And then reclaim the
previous high and overcome the resistance. On the way back down, it will
try to go to where it had found support. The price level it acquired to enable
it to move up.
Markets move randomly? It’s in the chart.
Issue 9/89 - Trader Vs. Scalper
I just couldn't resist this topic any more. Primarily because many
"experienced" traders just don't get it. Some of these "experienced" traders
have been trading for YEARS and yet they don't get why the scalper was
able to collect 40pts-100pts when the market only moved 3pts at the end of
the day.
The question is like asking a doctor how can you have miles of veins and
arteries inside this kid when he is only 4yrs old and 3 foot tall. And what do
you mean that basketball player ran 5miles playing basketball when the
court isn't even 100yrd long. In my former job, we would label such an
"experienced" trader as, 1D 10T. This same "experienced" trader would have
no issues collecting 4pts and attempt multiple times trying to collect 4pt
during that 3pt day and still be too 1D 10Tic to get it that he may have
attempted to get that precious 4pt at least 30 times that same day. And how
many points did he lose? Did it really cost him 20pts to get his 4pts? More
than likely.
Considering how some of these "experienced" traders trade, it really isn't so
far fetched that the most obvious possibility eludes them. While they are
trying to be a scalper, they use 1min, 5min and even tick charts, but when
they consider what the scalper is collecting at the end of the day, what chart
do they reference? The day chart.
1D 10Ts, if they weren't around, who will fund the scalper's winnings?
Thank you 1D 10T.
Issue 10/89 - Momentum Part 1
Understanding momentum is important to the trader. Going long while the
market is selling off is an example of a trader not understanding the market's
momentum. Or he was a scalper playing a pop, knowing full well it was only
a scalp.
Momentum Merriam-Webster Definition - Strength or force gained by
motion or through the development of events
I chose this definition because trading sites reference something else
regarding momentum. Also I want to stay consistent by the main premise of
this technical perspective that I've gained. As you know, I'm big on
Accumulation and Distribution. To me those are the primary mechanisms of
moving the market up or down.
So lets break this definition down for our purposes...
Strength or force gained by motion or through the development of events
In grade school, you learned a little about physics, specifically kinetic
energy, and potential energy. Many of my mentors always said... "...The
wider the base, the larger the space.” This statement is not reserved for
explaining a pop or rally, also for a sell off. It describes a market going
sideways for sometime and then expelling that potential energy by moving
the price. Ultimately what we are describing are results of accumulation and
distribution.
On many occasions, you will hear traders talk about consolidation. They
usually say the market is trying to decide which way to go. It’s waiting for
the earnings report, the report on this and that and or the government to
speak. But for me, consolidation is a flag.
"...Start to top or trade sideways..."
"...Start to base or trade sideways..."
For me, I know that the market has already decided. This is where you use
comparative analysis to your advantage. What? Flip through your charts of
different timeframes and examine the trend. Generally, wherever you are
noticing the sideways movement, you want to look at the next adjacent
higher timeframe. So if I were in the hourly, I would look at the 2hr, and
then maybe 4hr. If it is still not clear, I'll look at the daily and then weekly.
You must not trade on 1 chart, 1 timeframe only. How can you gain
perspective of what the market is going to do, without you understanding
what it is already doing? Understanding of the picture of the immediate
situation, the intermediate outlook and the long-term outlook. Give your-self
the advantage to limit your risks. Understand the big picture. Not just the
one in front of your nose. Look at those charts with purpose. Is this
Accumulating or Distributing? Where is this current action with respects to
the intermediate and longer-term trend? Are we being subdued or supported
by a long term level? How significant are the levels above and below?
Signs of Distribution
Bear Wedge, Double Top, Head and Shoulders
Signs of Accumulation
Bull Wedge, Double Bottoms, Inverse Head and Shoulders
There are other patterns mind you; these are the most common and
prevalent.
In order to recognize some of these patterns, should you limit your-self to a
1-year chart? NO! Why limit your vision? Some patterns take mins, hours,
days, weeks, months and years to develop.
In order to understand momentum, you must understand what caused it. This
concludes this first primer on momentum.
Issue 11/89 – Divergence
Divergence StockCharts.com Definition - A situation that occurs when
two lines on a chart move in opposite directions vertically. People often look
for divergences by comparing a stock's direction to the direction of its RSI,
its MACD or its Stochastic Oscillator. There are two kinds of divergences:
positive and negative. A positive divergence occurs when the indicator
moves higher while the stock is declining. A negative divergence occurs
when the indicator moves lower while the stock is rising.
I'm going to use this term in the same way most people understand
divergence, to demonstrate the definition accumulation and distribution as
we've discussed thus far. A good example will be yesterday's action on the
ES. I found it amusing to hear many people were ready to short the market
hard. So sorry. So sad. Some people used the news and government has
made trading the market hard. I agree with them but not in the same way. If
you truly understand technicals, you will not subscribe to trading the news.
Don't get me wrong. News has its place on how the market moves, but to
trade relying on it as it breaks is like voodoo.
If you truly understand technicals, you should know that the technicals have
to provide the means to allow the pops and drops that occur when the news
is made public. And that means, market must accumulate or distribute prior
to the public release of the news. Is there a private release of the news?
Hmmm....
StockCharts.com says "...situation that occurs when two lines on a chart
move in opposite directions vertically." There are 2 lines in the Stochastic
and MACD.
Positive Divergence
On this chart, you will notice the MACD and stochastic are in their positive
divergence cycle. The 2 lines of each oscillator are apart from each other.
Ergo Divergence. Where the fast runs opposite the slow. In this case the fast
is above the slow, therefore the oscillators are said to be in positive
divergence cycle.
Negative Divergence
On this chart, you will notice the MACD and stochastic are in their negative
divergence cycle. The 2 line of each oscillators are opposite of each other.
Where the fast is below the slow, this is known as negative divergence cycle.
So far pretty textbook right?
StockCharts.com also goes on to say "...positive divergence occurs when the
indicator moves higher while the stock is declining.”
How many of you were sure the market would finally correct hard? So sad to
see the funnymental bears were so painfully served yesterday. The price
action of the ES re-tested the previous low on an escalating MACD. We
know this as accumulation. StockCharts.com and the entire technical
community know this as positive divergence.
StockCharts.com also goes on to say "...negative divergence occurs when the
indicator moves lower while the stock is rising.”
Were you caught going long at the top with this? Market kept going higher
and higher. The funnymental bulls thought this is where we breach the
previous high and zoom to 1200 on the ES. Higher highs on lower and lower
MACD is textbook definition of negative divergence. Head and Shoulders
pattern is known as a distribution pattern. Imagine that.
Some funnymentalist who figure they are smart and maybe so in their own
right, would say, "well this is all after the fact"..."hindsight is
20x20"...BLAH BLAH BLAH BLAH BLAH! You've just been equipped
with some technicals; see if you can gauge it as defined while the market is
in play. It’s in the chart!
Issue 12/89 - News Trader
"We're going to rally because GS beat estimates!" "We sold off because the
unemployment was bad!!" "Why are we selling off?!!! All the news is good!"
"Obama just talked !! It’s why we sold off" ... before that "Bush is talking.
Short it!!"
Ever seriously listen to the funnymentals that follows every news trader's
lips when they explain how things work? If there was any consistency to it
or not? Ever really made sense of it all? Have you ever notice the air of
conspiracy in their tone?
Why is it when the news announces that we are in a rally, we sell off? Why
must you find an excuse to everything, when the only real thing about the
market is in your charts?
How the heck do you trade when you have to have a reason outside of the
charts to trade? It is why most traders are so confused. They have nothing
concrete to base their trades on. Something consistent and pure. With all the
tools available for today's traders, why even have a chart and candles and
any technicals at all if all you need is to interpret the news. It’s like
psychiatry. Out of all of medical science, it is the most unscientific branch of
medicine. How can you explain and even measure (IQ) something you don't
even know how it works or what it is. The science of psychiatry is just like
the funnymental news traders. Full of contradiction.
We reached a significant level at 1139.25 causing a distribution and therefore
we sold off to the next significant support at 1130.75. In shorter timeframe
we accumulated for the pop up and re-tested the previous high but met
resistance and failed. Retraced to the previous low on higher MACD,
accumulation, popped again. Simple repeatable technical analysis. The blind
news trader doesn't see the setting up of the effects of news. Some setups are
weeks in the making and many news traders fall prey of buying at the top
and selling at the lows.
The Truth
Since Jan 4, 2010, based on this chart, does this look like an accumulation or
distribution to you?
Can you therefore conclude that due to this chart that Obama or any other
news was the single cause the sell off?
Here is the challenge to you. Be completely news free. Try noting the
accumulation and distribution as the world waits for the publication of the
all-important news. Today before the open the news traders were calling
rally. LOL !
Issue 13/89 - Trading The News
There are many things that help move the market. The media makes it seem
that it is due to these "news" that the market behaved in such a way. Then
when there appear to be many news worthy issues happening in the market,
they like to try to put the blame toward a single event.
It seems that some of the media blamed it on Bernanke's precarious status to
maintain his office was bigger news than Obama, and bad earnings
expectations. To the news trader, these events prove their point. The
underlying condition of the market didn't matter. Perhaps if they, the media,
spoke of the underlying, would they therefore be suggesting or making
market calls? That definitely, they are not allowed to do. But it is funny, that
after something has taken place, they do have the right person on hand, with
charts and all, who can explain the technical nature of the news driven event.
It amazes me to hear that some so called "experienced" traders never saw it
coming. Some of these "gurus" to whom many pay to hear their calls or
subscribe to gain their "expert analysts" are left saying "news and
government making this trading environment difficult.” The thing that
amazes me most is that these people will provide you technical explanations
of their setups. Yes, they even use charts. But when it comes to trading this
drop that we've experienced. They failed to notice what the charts have been
leading to this outcome for quite a long time. Every stock that dropped, were
poised for the drop, prior to the news.
By the time news is made public, the market or the equity has already been
poised to the desired effect. What?!
Do you mean to tell me that this setup, in this chart eluded the gurus? This
very same chart that the "experienced" and "gurus" and media will use to
show how the market tanked, caused the market to tank, due to those news
worthy events as it was made public? Then and only then? The high 1148
occurred on the 1/11/10 1am and on 2 attempts we failed to get news highs.
On 1/14/10 1pm, and then again at 1/19/10 1pm and on each those latter 2
attempts, the MACD, progressed lower and lower, suggesting the lost of
bullish momentum. By 1/21/10 1am, the bears took over and technically, by
any technician's standards, the 1/21/10, where many funny news traders
expected a rally, the bears had their grills hot with coals ready for a feast.
Not only were the bulls on the menu, but these funnymentalist news traders.
This was not obvious enough to merit caution on longs and take advantage
of the short?
How do you trade the news?
You silly funnymentalists. You have charts so use them! You know your
technicals too. Use them! Clear your head of all the news you know is
coming and just read your charts.
It’s funny how people can talk about chart patterns but only after the fact.
It’s funny how they can talk about divergences, but after the fact. During the
trade they resign to one explanation. "Predicting the news is difficult at
best." LMAO!!!!
News is "a" reason why markets move. The trick is knowing that the results
cannot happen without setting up an accumulation to support a pop, or a
distribution to support a drop. Just like any other trading day. How does that
happen, that markets setup prior to the publication of the news? Read any
trading books you can get your hands on, they all say the same thing.
"NEWS IS LATE!!!"
I have to wonder what news traders do when there is no news? Horoscopes?
It’s in the charts.
Issue 14/89 - Setting Stops
Setting a good stop is essential for risk management. Not too many people
understand how to do that properly. So I'm gonna take a stab at it and hope
you can benefit from it.
Stop Lost StockCharts.com Definition - An instruction to the broker to
buy or sell stock when it trades beyond a specified price. They serve to
either protect your profits or limit your losses.
What is it for?
To protect your profits or limit your losses.
Setting Stop On Distribution
Here is a sample of a distribution play. We recognize the toppiness as a sign
of distibution. This toppiness demarcates the resistance and our entry price
range for our play. So we want to short. The median box highlights
potentially good entry zone, along with the resistance price level. Isn't the
market very nice.
Identifying the stop price
The yellow line spots the stop for us at 1096 on GC this fine 8:33 am est.
Why do we choose 1096 as our stop? The logic is very simple. At 5:36 am
EST, it is 1096 support that we lost that allowed us to move down. So this
retest of that lost support is now resistance. If we close above it, then we will
move higher.
Setting A Stop On Accumulation
Here is a sample of an accumulation play. As you can see we have candles
moving sideways, demarcating our median price range for our entry,
including the support price. See how cooperative the market is on showing
you an opportunity?
Identifying the stop price
We will consider 1104.75 as our stop price. Because at 10:07 am EST, we
sold off at this price level and when we closed above it at 10:28 am EST, the
price moved up. Simple logical way of identifying your stops.
Playing spots of Accumulation and Distribution provides you safe entries.
The candles help you identify your entry and your stops. All you have to
decide is which way it will go. Is it a scalp or a longer-term play. Scalps say,
your target is conservative and tight. Longer term, suggest you have
confirmation on higher timeframes that the move will be larger and that is
where you will get your target exit price from.
As you notice these charts are on my tick charts, the same process is
consistent on higher timeframes. So be comforted that the technicals are the
same on any timeframes.
Protecting your capital and your profits is good risk management allowing
you to continue trading. As usual, everything you need for a good play is in
the charts.
Issue 15/89 – Trend lines
Support and Resistance are really lateral trend lines. There are trend lines
that move diagonally and are the primary components of a wedge. The
wedge has a floor and ceiling trend lines. When you combine trend lines in
such a manner you get what is known as a channel.
Trend StockCharts.com Definition - Refers to the direction of prices.
Rising peaks and troughs constitute an uptrend; falling peaks and troughs
constitute a downtrend. A trading range is characterized by horizontal peaks
and troughs. Trends are generally classified into major (longer than a year),
intermediate (one to six months), or minor (less than a month).
What is a trend? Direction of prices.
Now regarding the classification. I really don't care for the bracketed info,
not that it isn't correct but it’s a matter of perspective. The major is the larger
overall trend, inside of it there is an intermediate trend that will bounce up
and down inside the major trend without breaking it. And inside the
intermediate, you have a minor or more immediate trend that does the same
thing.
You may have a major trend in the hourly and it will have the intermediate
trend in minutes and then minor trend in the tick charts. And then you can
shift your perspective in the weekly, daily, hourly. Psychologically, this is
where people break down. They don't understand how to work in these
timeframes where they are confident that the trend they understand is still
intact. They work in the daily weekly trend and see the hourly take them
down in points and they think they have lost their trend but they haven't in
the larger timeframe from which they based their entry on. More on this
later.
Trend lines StockCharts.com Definition - Straight lines drawn on a chart
below reaction lows (in an uptrend) or above rally peaks (in a downtrend)
that determine the steepness of the current trend. The breaking of a trend line
usually signals a trend reversal.
Trend lines give you a graphical understanding of the market movements. So
long as the action does not break your lines, the trend remains intact.
Breaking the trend line means the candle closed outside of the trend line. If it
just deviates the boundary but does not close, then your trend is still sound.
We've already discussed how to set stops.
In this image you see #1 as the major trend, and #2 as the intermediate or
minor trend. One trend line on its own is not as powerful as when you
combine 2 trend lines to make a channel, and it will help with that issue we
mentioned above.
Channel StockCharts.com Definition - When prices trend between two
parallel trend lines, this is referred to as a channel.
In the graphic above, the green lines are more textbooks to the definition of a
channel. However, a wedge is a channel as well. The lines not parallel
because eventually they meet, but it is still proper use of trend lines to form a
channel.
The yellow lines show you a major trend. As you see the price action bounce
within that channel, it is quite obvious that you don't want to go long at the
top of the channel but at the bottom. And you don't want to short at the
bottom of the channel, generally (if this was a bear wedge and it is about
mature and you are late to the party, perhaps you can get a few points,
perhaps), because you will sustain major pain. The general rule is this:
"Short at resistance. Go long on support."
All seems like simple common sense, but you wont believe how many
people don't take the time to understand. They get all mean and angry and
hateful about the world, the government, and whom ever else they think is
messing with them. Fate has conspired against me and I know who is
responsible! Laughable!! If they took the time to understand the technicals,
they would be much happier. I know, I was once like that.
If you notice the crazy ups and downs within a long-term trend, you will also
see the same kind of action in the hourly minutes of the intraday, just to form
1-day candle. What you have to decide is this, what timeframe are you
basing your trading decisions on? If you are in the daily, stay with in the
daily expectations and don't fret about the wild swings of the intraday. But
by all means understand your stops on the daily chart basis. In the course of
the day, you may see that stop deviated but if the daily candle doesn't close
at or beyond it, then your daily play is still intact. Understand your range and
understand what needs to happen to get to your target and what must not
happen (stops) to break your play.
Use the shorter timeframes to get the best and earliest entry you can. If you
are about to short at resistance, you can get into the shorter timeframes and
wait for the distribution to happen at resistance. If you are about to go long,
wait for the price action to come to your support and begin to accumulate.
For a more elaborate explanation trend lines and channels, checkout
StockCharts.com Trend lines and StockCharts.com Channel. No I don't work
for StockCharts.com, I just like their site for info. Check out my links on the
left for more sites I visit.
Issue 16/89
Kewltech skipped this issue.
Issue 17/89 - Momentum Part Deux
In order to understand momentum you must under stand what caused it.
We've talked about news, and divergences. Many people trade the news.
Technical traders do it too but by understanding how the market sets up,
prior to the public delivery of the news.
Public delivery? If you had the resources of the MM's, what could you do?
Mind you, the retail traders are a small percentage of the trading population.
The truly large MM's have massive staff. One celebrated hedge funder hires
many talented mathematicians to calculate probabilities. Would it behoove
these large MM's to invest time and money to understand the sectors they
have interests in? Use your mind to extrapolate from there, to the extent of
how they would wisely use their resources. As for reports and federal
changes. Do reports of over 100 pages suddenly and be so easily interpreted
the moment it is released? Many reports are actually sent out 2 weeks in
advance to those who require them. Do you really think that the feds would
do anything without discussing their proposed changes to those most
affected? Ever heard of lobbyists? Google has their own lobbying machines.
Would the fins also? You know those industry news that covers specific
industries, they can come up with their niche market's share and can guess
how well companies are doing and knowing who got what contract and who
didn't. News is therefore late.
Ever noticed at earnings, the stock that is about to release their earnings,
experiences a rise in price. People and news buzz with excitement. People go
long on the stock driving up the price. Earnings released it was great and
wonderful but something fundamentally was wrong. Sell off. You should
have noticed the negative divergences. MM's were selling systematically.
What do people say after that. The response was already baked in. People
knew in advance.
It’s market manipulation!! If it were market manipulation, should you have
the means to detect it? If it were being manipulated, would charts be any use
at all? The data would be lacking and unreliable. For your information, there
are interests to hide transactions so the charts wont reflect them. Who's
lobbying for that I wonder? But the charts truly reflect the market. It isn't
lacking or unreliable. So many people work so hard to link news to extremes
that everything becomes a government conspiracy to them. Most of these
people are bitter angry people. And the sad thing is, they don't even have
their facts straight.
It is like the ‘Made In America’ campaign vs. Globalization and Free Trade.
The real reason free trade makes sense is that we've become a highly
developed technological nation. And due to our labor unions, cost of
production is too high to compete with the emerging markets. Free
Enterprise is about buying cheap and selling high. That's the American way!
So what is the natural progression? Move the production to 3rd world
countries and take advantage of the cheaper labor. Build up their economies
and then gain market share over there. Ergo, more jobs for us. Not labor
jobs. But technology, management, support and infrastructure. Why? It’s
what the hard working Americans dreamed for their children. The reason
they paid for their college education. The shift is from manual labor to using
our minds. It’s called progress.
The point is, people are being misinformed. Politicians make it hard to
believe anyone because they are a bunch of turncoats themselves. Who's
fault was it that caused the problems? Was it Obama? Or was it of years of
policies the senate and congress passed prior to Obama. How is it that these
guys are now suddenly experts on economic policies and yet through their
tenure, they didn't see this coming? Some are pretending badly. What are
they focusing the blame on? Not on those policies they passed but how
Obama and company has chose to address them. It’s a voting year people.
There is meaning in their madness. Who has a longer tenure? Presidents or
Senate and Congress? Who will lobbyist talk to more? Lets get back to the
task at hand.
Enter the Divergence
Why do complex chart patterns form? Double tops, double bottoms, head
and shoulders and inverse head and shoulders? All about divergences.
Distribution patterns happen because on the lower timeframe, you have
declining bullish momentum. In the higher timeframe, it has not experienced
this decline of bullish momentum, because it was heavily bullish, and so as
the shorter timeframe continues to lose bullish momentum, the higher
timeframe's bullishness pushes the price higher and you get negative
divergence in the shorter timeframe. The shorter timeframe maintains its
decline in bullish momentum, finally causing the higher timeframe to
weaken. Bam!! Price pops up forming a double top. Price goes down hard.
Oh but wait the higher timeframe's next adjacent higher timeframe is still a
bit bullish. Bam! A head and shoulders formation. And then finally all of
them are weak. Market tanks.
Which of these 2 charts is showing a more pronounce negative divergence?
How long did it take the weekly to reflect the sustained events in the daily?
Obama took office Jan ‘09. Since then the market skyrocketed from its lows.
And last 2 weeks we've seen a draw down. Is it back to previous lows? Not
even close. People for months have been saying the market is moving
sideways. It’s the policies!! Who cares! Trade what you have before you!
Don't engage in funnymentals. You'll just get angry, especially when you
hear these "expert" opinions in the chat rooms.
A correction was due. We were oversold. The momentum down was built up
due to the distribution that started back in June-July09. You get a little pull
back and all of the sudden Obama and company are crooks.
2 words: GET REAL!
Momentum moves when you finally have all your timeframes working in the
same direction. When the offsetting of the bullish and or bearish volume
surpasses the other. This is true in all timeframes. Why do the longer
timeframes have to participate? Because the longer timeframes are the truer
representation of market status.
Can it be made to move the other way and avoid the completion of the
pattern?
Yes. To divert a distribution pattern, you must set up an accumulation and
have sustained bullish move upward to change the dynamics of the longer
term. Detectable? Yes! Absolutely.
Putting it all together
1. The longer term trend rules.
2. The shorter-term trend can show you the trend changes early.
3. If the shorter-term trend is sustained and strengthens, it will affect
the longer-term trend.
4. Complex chart patterns form due to the offsetting of bullish and
bearish volumes between short and long term timeframes.
5. When timeframes are inline with each other in direction, you get
moderate-strong moves
6. News happens, but release is usually late - reaction to news is set
up prior to release. The release of news accelerates the outcome.
It’s all about the price action.
In another point of view, without noting divergences in the oscillators – you
can detect these divergences by just looking at your candles. You may notice
your candles trading sideways and forming distribution or accumulation
patterns but on your higher timeframes, the candles are not even going
sideways yet. They are still moving based on the accumulation and
distribution they affected in the higher timeframes. Therefore what you are
noticing in your lower timeframes is the weakening or pause of momentum.
Until you have the longer timeframe moving in the same direction of the
shorter timeframes you will not see the momentum in the opposite direction.
What do you need to see? Longer timeframe candles move sideways to
reflect the accumulation and distribution patterns of the lower timeframes.
Basic and logical.
The mechanics of this price draw down we are experiencing is really
mechanical. It is a process that occurs everyday with or without the news. It
is an exhaustion of resources. Any chart patterns that you see in the daily
occurs in the tick and in the monthly yearly charts. Whatever timeframe you
choose they occur exactly the same. The offsetting of bullish and bearish
momentum can sometimes be short or extended. Some move quickly some
may take years to develop.
Get rid of the emotional trading that can cause you to over analyze the
market. Stay technical. Fundamentals and news has its place. But when you
are getting into a trade, decide based on the charts.
Momentum is gained when the accumulation or distribution of 2 or more
adjacent timeframes are inline with each other, producing a strong move up
or down respectively. The more timeframes working in the same direction,
the stronger the move. The result could be the formation of 1 candle or the
finalization of a large chart pattern. It all depends where you are playing
your trade.
Go listen to some baroque music. Breathe deeply and engage in thought.
Much better than going broke because you listened to some funnymental
conspiracy. Think for yourself and read the charts!
Issue 18/89 - Chart Patterns
It is said that the chart pattern is the psychological representation of the
market. Many traders successfully use chart patterns to their advantage.
Some only play a particular chart pattern and make a good living out of it.
But many experience traders can't see them till after they have formed. I'm
not going to talk about all of these chart patterns. If you want to learn about
the different chart patterns, go here, The Pattern Site. This guy, Thomas N.
Bulkowski, even wrote a book, Encyclopedia of Chart Patterns (Wiley
Trading), well a few other books. His website has great info even though it
looks a little rough.
The problem with chart patterns is that people don't look for them. They
don't understand how they form and even why. And therefore they don't see
them until it’s already too late. Or many don't bother to look. Which is sad
really. Considering the value of chart patterns isn't just in the perceived
outcome, but as they form, they serve as a guide for the perceived market
momentum and direction. Ergo...confirmation of what you are reading is true
or false. That is valuable.
The Trap
There are probabilities of success fail on all these chart patterns. I've already
discussed with you why there is failure on the basic chart patterns. If you
dwell on these numbers and it is all you're basing your understanding of
chart patterns on these probabilities then, it is of no use to you. Oh look a
double top! Oh but the probabilities of it working out in this environment is
bad, it wont work out. It’s not the pattern. It’s the underlying.
The How and Why They Form
By now you should already understand the main theme of my message. It is
all a matter of accumulation and distribution. The basic chart patterns are the
bullish/bearish wedges. The more complex are the double bottom, double
top, head and shoulders and inverse head and shoulders. And there are
others, which are variations of the basics patterns I've already mentioned.
The problem is that people don't understand how they form and therefore
cannot utilize chart patterns to the full extent. Complex chart patterns are a
result of accumulation distribution initiated by lower timeframes, against a
heavily one-sided higher timeframe.
The highly bullish higher timeframe, while the distribution is already
working in the lower timeframe, this will causes complex distribution
patterns to form (double tops, head and shoulders, etc.). The distribution
must be sustained or substantial to offset the bullishness of the higher
timeframe.
While the highly bearish higher timeframes causes complex accumulation
patterns to form (double bottoms, inverse head and shoulders, etc.), as the
lower timeframe starts its accumulation), the lower timeframe accumulation
must be sustained or forceful to offset the bearishness of the higher
timeframe.
On both instances, what do you use to see if the efforts of the lower
timeframe are working? Look for you higher timeframe MACD to converge.
Review all of my previous charts and you'll see what I mean.
What is it about lower timeframes vs. higher timeframes? Buckets. The
higher the timeframe, the bigger the bucket. The higher the timeframe, the
larger the volume it represents. The larger the volume, the truer the trend it
represents. Timeframes is sampling. Gives you near term, intermediate term
and longer-term views of the market. In order to bring the price down/up
significantly, you must see the accumulation/distribution from the lower
timeframes affect the higher timeframes. So if the higher timeframes are
bullish, you should understand why the head and shoulders form, the peaks
are being formed because the bullishness of the higher timeframe imposes
their strength.
Text Book Chart Patterns
Sometimes, in fact most of the time, the chart pattern before you wont be
textbook. There are variations of these chart patterns. It isn't the exact shape
that is really important. It is the underlying. The process of accumulation and
distribution. Remember also, that each timeframe has an agenda. Lower
timeframes work to hit their levels of significant. Accumulation moves
toward lost support and previous highs. Distribution moves toward previous
support and previous lows. This happens in all timeframes and so a higher
timeframe usually has a higher price level in mind while the lower
timeframe is incremental to that goal (higher timeframe goal). Deformations
are normal and the uglier the chart patterns the better. Those who have no
imagination or are anal about exacting chart patterns fund your winnings.
This is why those who can visualize well make better traders.
If you haven't understood yet, don't have tunnel vision. Tunnel vision can be
deadly. You may have a head and shoulders in lower timeframes and only
have a 2 bar reversal in a higher timeframe. Your huge 5min head and
shoulders may only be an inverse cup and handle in a 120min chart. If you
see a chart pattern, figure out how the higher timeframes will help or fail that
chart pattern. It will help you on managing your risk. It will help you
anticipate the formation of the chart pattern before it is even recognizable.
Setting Stops On Complex Chart Patterns
Ideally, you should your stop based on a higher timeframe. Primarily
because, it has a higher level of significance will be easier to assess from
there than if you are gauging from a lower timeframe event. This will
prevent you from losing your stop money. You may be playing a lower peak
only to have it retest the previous high off another peak. My general rule, set
your stop based on the higher peak for distribution, lower bottom based on
accumulation.
No Shortcuts
If you're too lazy to put in the work to figure out how to play these charts
patterns and understand how they form and why they form, then you're not
going to be able to use a very significant tool in your arsenal. To use it you
must practice. It can be argued that they are not necessary. Semantics. A tool
is a tool. Why labor for something when a tool can make your life easier.
The only shortcut you have is for you to visit Bulkowski's site and get
familiar with the chart patterns. Invest time on each chart pattern so you can
recognize them and know the in's and out's of each. Another good site to
visit AskBucky. This is the guy who taught me about chart patterns and
trend lines. Comb through each of his charts. It only took 4 of his charts for
all the stuff I've ever read about chart patterns and trend lines to click in.
Visit him here too.
Issue 19/89 - Comparative Analysis Part 1
As you know already, the 2 mechanisms that move the market Accumulation and Distribution occur in all timeframes. The lower
timeframes work to achieve the higher timeframe's agenda. It is that simple.
The problem is when people disregard this relationship. This is when they
don't see the limits of an up move. Primarily the up move. Many still don't
know how to short the market. So many really lose their money because they
are have the Johnny Come Lately disease.
Mental Midgetness Issues
I laugh at this term. I learned it initially from one of my favorite high school
teacher. Only to come back to me as one of my mentor's name, Mental
Midget (levels master). There are many "experienced" traders out there that
only go long. The concept of short is foreign to them. There are many
"experienced" traders out there that deny the truth about technical analysis.
There are many "experienced" traders out there that cannot grasp the
possibility of being able to play every pop and drop in the intraday, but they
on the other hand try to play them off the longer-term charts. What is the
issue? Mental Midgetness. The moon was once unreachable. These
"experienced" traders don't know how and therefore it must be impossible.
When people think of investing, they want growth in their accounts and
growth in the stock that they invest in. The concept of making money when
stock and markets goes down was impossible at one time and yet people get
into their comfort zone and only see what is at the tip of their nose. This
problem is prevalent to many "experienced" traders. They impose limits
when logically there is none. They don't want to use charts larger than 1yr
daily, they don't see the benefit. They don't want to use historical data. They
don't even believe that what had happened back in 2008, 2001 was all
predetermined, prior to their famous events. Chart wise and indicator wise.
They learned to make some money and when they are wrong, they look for
news to rationalize their mistakes or label it as a conspiracy. Why? Because
they stopped learning.
Comparative Analysis
Many traders seem thoroughly circumspect prior to entering their trade.
They consider many things all at once and when you talk with them they
have many technical analysis, fundamental analysis, Greeks analysis.
Primary driving factor for their trade. News. Basis for their trade. News.
What is it about the news? The fundamentals and the expectation of the
news (earnings or what not). Basis of their technical analysis. It appears the
stock is moving up and so it will move even higher due to the news. This is
for 1 trade, for 1 play. A scalper makes many decisions on the fly in less
time than many "experienced" traders take to sip their coffee. This
demonstrates a level of skill that is needed. Some things are simplified to the
scalper vs. the trader. No news. No fundamentals to consider.
Comparative analysis is not about fundamentals vs. technicals. Comparative
analysis is understanding the true trend. That means you know the near term,
intermediate and longer term trend. When it comes to movement in the
market, it is really all about the charts. What is technically possible is what
will be the outcome once the news is released.
From the March lows, all people could think the market could do by June is
to go up. Weee! We're going back up to 1500 in no time. The economy is
good says the news. By May 11th, you should now recognize something, as
followers of this blog. Mental Midget says, it’s not what you do during the
day that matters. We may have broken through it during the intraday, but
based on the daily chart, you did not close there. It is where you open and
close at the end of the day. I don't recall what the government was doing
back then, but I assure you, the funnymentalists were hot and mad. Market
Manipulation!!! What was happening by May 11th, 09 is Distribution of
course. The error is framing. Piercing the price and closing are 2 different
things. If you close at or above the level. That is more significant than just
piercing.
What is the significance of that blue line?
A significant price level of course!!
Jan 6, ‘09, demarcates that price level. Since it was a significant level, in
order to go higher we needed to close above it. Momentum was to the bears
by May 11th. So there was no more gas to push it through by June 10th.
Technically not possible. This is the first test of the price level since Jan.
Generally, we always fail at the first attempt.
March Lows ‘09
Bear Side of the Story
They tried desperately to hold that 942.75 support, reclaimed it a few times.
Until Nov 6, the bears took it over. But the bulls were not done yet and they
took one more valiant surge come Jan 6, that is when they received that fatal
blow that brought on the Mar 09 lows. This will be how the bears will
remember this story.
The Bull Side of the Story
By Oct 27, 2008, the bulls started to take control. By Jan 21st, 09, we
thought we had them. The bears have had their fill but there were still few
who wanted to drive this back down and their last ditch effort was in March.
That is where we took our stand and finished our accumulation. Weeeeeee!
If you can identify this. You're getting there.
Comparative Chart Reading
A picture is worth a thousand words. The chart above should get you at least
5000 words. If you can't find the stories that are in your one single chart.
You won’t notice significant price levels. You won’t notice points of
accumulation and distribution. You wont notice what the market has to do to
move higher and where it will close to move lower. You wont successfully
read all the charts that help you make a decision.
Issue 20/89 - The Indicator
When I first looked at indicators, I honestly didn't know why people say this
is a lagging indicator and this is a leading indicator. Then there is this
negative divergence and this is positive divergence. When you compare
candle to candle, it is very clear to the novice, they are all lagging. And
seriously, it is right.
When it comes to indicators, people look to them to predict the next move.
Holy Grailers want their indicators to tell them to buy or sell. To do the
trading for them. So much faith is placed on custom indicators it has become
big business. I think people who rely only on their indicators, perpetuate
their ignorance. For the most part, ignorance is not bliss in the market. The
problem is not the tool. It is the user of the tool. The other problem, the user
doesn't know how his/her indicator relates to the price action. Beyond the
obvious. I say this because, in order for you indicators to work, it considers
the same incoming data to produce your candles. The underlying. People just
take things at face value without really understanding the why. The why is
always left to divergences.
Divergences are true enough but it doesn't explain to you the why. Ever
wonder why you don't have faith in what you see? I'm a bit of a quant. I like
to know the underlying.
Many people who have tried to understand how to use indicators have failed
miserably. There is no faith into them primarily because, their use of
indicators is casual empirical. The other reason why they fail. They don't
understand how to relate them to other timeframes. Effective use of
comparative analysis.
To compensate, people use multiple indicators. They go from 1-2 indicators
to 50. Ever wonder why the carpets in the casinos have busy patterns? Visual
stimulation. Mixes in with the beeping noises and flashing lights and keeps
you thinking of playing the game. Too much visual stimulation is death by
indicators. Paralysis analysis. Really all you need is 1-2 if any at all. But that
depends on the person. Like I said, I'm a bit of a quant and I like to see the
underlying.
Why indicators work
It is really silly to say that indicators do not work. Not to offend some of my
mentors who don't really care for them, but for me, based on how I've come
to realize how indicators work. Based on my understanding, it is the same
thing as using candles. The reason is, they both use the same data to produce
their graphical representation. Applying effective comparative analysis,
provides you the same reads, not price based, as if you are using candles.
The difference is how the indicators represent the market.
People make things more difficult than what they really are. There are only 2
things that result in the intrinsic value that we know as price. Buy/Sell.
Bull/Bear. 1/0. On/Off. Extrinsic is supply and demand. Don't really care
about them. People know them as oversold, over bought. But those 2
extrinsic entities are relative. Relative to the timeframe. Don't really care to
know them. Cut it out from your considerations and simplify your decision
making to - accumulation and distribution.
The difference in how indicators represent the market is the key to why they
are known as momentum indicators. You see the real idea that indicators
came to be, is to describe a non-price base representation of the market. In
the same manner that people try to understand trend in the market via
candles, is the same way these momentum indicators work. The failure.
Comparative analysis.
All indicators are lagging. Through comparative analysis, they become
leading. What separates a pro trader from a novice. They know the
trend. If trend applies to your candles and chart patterns, why don't they
apply to your indicators? They use the same data!
You got the hook from this article. There are a lot to consider from here on
out. I refuse to hold your hand. Think about it and apply what I'm leading
you to understand. Cast your ego aside and open your mind to what you
thought was originally not possible. Logically what I'm suggesting is true.
Do you remember the scientific procedures you learned in 3rd grade? Well I
learned them in 3rd grade. Casual empirical is lazy. You don't need to be a
rocket scientist to understand what I'm alluding to. It is so basic. When you
get it. You will laugh.
Issue 21/89 - Comparative Analysis Deux
OH!! CANADA!! CONGRATS ON THE HOCKEY GAME IT WAS EPIC!!
Before
Does this look like distribution to you? Now you can't deny the
accumulation from Thursday. But in larger picture, can this be distribution?
This also shows some kind of distribution formation and shorter term, an
accumulation.
A more distinct accumulation in the short term but the range of distribution
is still evident here.
An accumulation is building here for the short-term play. Nothing to suggest
what is building in the longer term. So don't be lulled to carry a longer-term
bias and not play the short-term.
Confirmation of the short-term play. The levels that will be hit are marked.
Can see this going higher to test the previous high because 30min, 60min are
helping.
The accumulation pattern here is quite clear.
Result
The short-term accumulation play works out.
Hitting all our targets.
This is why you have to understand the short term and longer term. If you
formulated a bearish bias and had entered based on the 60/120/240min
charts. You would be suffering some pain right now.
Your short term must not be ignored. Although the long-term is indicating a
short bias. You must still play the short term because that is the incoming.
Many traders look at their charts and create a bias based on daily/weekly
charts. They enter the trade and ignore the intraday charts which may drop
them a few more points before it moves in the direction they desire. What
happens next is this, they suffer intraday draw, and get scared away from
their trade and take the loss. Come the end of the day, the draw is not
significant, the daily trend is maintained but the clueless trader already took
the loss.
One of the main reasons they felt the heat early, they really didn't understand
the short-term trend vs. the longer-term trend. They don't know how to add
up the details of the charts and base their play in the correct timeframe. The
draw they felt was completely unexpected and then they made their decision
based on the daily candles and so the wicking of the daily candle put in
major fear.
What is that? You don't see the distribution you say? Yee of little faith...
Been since Feb 14.
Issue 22/89 – Metamorphosis
In the beginning, when I first looked at charts I tried to look at it with a
mathematical perspective. I tried to understand the seemingly symmetrical
movements of the market. I tried to have an objective look at the market but
being ill equipped about technicals, I soon abandoned the notion.
After engaging in some chats, I came to be a funnymental news trader. It was
the natural way to go. Everyone else was doing it. So after almost losing my
shirt, I needed to go back to technicals. It was the only way to really
understand how things moved. Certainly, after so many hundreds of years of
trading, someone would have documented some truths about trading. You
don't need to buy a book. Everything is online.
The truth in trading is, everything is technical. Yeah yeah sure sure news this
and that, but in the end it is still technical. The market does not move
randomly. It requires accumulation and distribution to move the market up or
down. So simple. The symmetry I knew of before came back. I understood
momentum and I understood support and resistance. And I finally
understood how the market moves.
So read up on all the truths about trading and get technical but then there is
one more hurdle in your journey. Daily you are bombarded with stupidity. It
doesn't matter where you turn there is stupidity continuously suggesting this
and that, contrary to what you know to be technical. And so you have an
illness. Some people identifying it as an "emotional" issue. You can't trade
what you read. You can't trade what you see and you get shaken out of your
trade too early or not soon enough.
"I saw it. I read it. But I still traded against it or didn't trade it at all." Sound
familiar? This is the final stage of your metamorphosis. What is the real
problem? Attachment. It isn't emotional. It is what separates you from the
beginner to the advance trader. You are still clinging onto the stupidity you
once knew before and you are not letting your technical understanding of the
market lead you. You are mindful of your trade and your grasp of the
technicals waver. It is like training all your life for the Olympics. You have
had the best training. The best nutrition. The best physical conditioning.
When your moment comes, you doubt.
Doubt is easy to fix. Find out what you think is missing from your
understanding. If you have doubt then there is something you have not sold
your mind into believing. Perhaps you didn't get everything. But if that isn't
the case...it is attachment.
Trade with no mind. Get out of your way.
Issue 23/89 - Moving Averages Vs. Levels
Moving Averages are a great tool. I'm not going to go on and on about them.
It is part of my tool belt but something I rarely use anymore. Many people
can sustain a good income playing them. And I'm not knocking their value
and effectiveness. Utilizing them as part of your trading system is great if
you know how to use them effectively. I highly suggest for people to use
them if they can figure out how.
The main use of MAs (8,20,50,100,200,300), is support and resistance.
"When the price action stays above the 8/9 ma, it is a sign of a rally."
AskBucky.
As a quant I also understand that they are calculated averages. So when it
applies to your chart where your candles sit, those lines will run with the
price action because they are averaged prices during that time of day based
on some history. It is a really kewl tool to use. In the same vein, person
pivots and Fibonacci lines. Mathematically, they are valid. What is
interesting, is that they always match up with price levels. So in the spirit of
KISS, I do without them. I just use levels. But that is me.
What is more meaningful to me is how levels are lost and gained. With
levels you gain the actual mechanics of candlesticks. A thorough
understanding of levels gives you where the candles will try to go and where
they will bounce or be repelled. Those are in the same manner that people
utilized pivots, moving averages, and poc. They all do the same thing, just
different names and different rationalities. Regardless, the root is levels.
How do scalpers scalp with accuracy? Levels.
See a long-term level always manifest itself over and over again. You will
always notice opens, closes and tips over and over again. What is also most
interesting is they are usually spots of consolidation. So why complicate
your life with fibs, ma's, pivots, poc's and what ever else if you can gain the
same and even cleaner understanding if you use levels.
Another use of Moving Averages for me is the MACD. The MACD is an
oscillator that is known as a lagging momentum indicator. With the MACD
and comparative analysis, you gain a confirmation of accumulation and
distribution. Effectively, it becomes a leading indicator.
The problem with MACD is people don't really know how to use it. They
don't even know how it works with consistency. The problem is they don't
know what the underlying it is really using. Seems funny but go to any
website talking about them including StockCharts.com, StockCharts.com
MACD Definition, scroll down to the drawbacks. Proper use and
interpretation of the MACD negates all of these drawbacks.
I especially love this one:
"As a security increases in price, the difference (both positive and negative)
between the two moving averages is destined to grow. This makes it difficult
to compare MACD levels over a long period of time, especially for stocks
that have grown exponentially."
It has nothing to do with price. If they can't explain why I think this last
statement is laughable and can be negated, remember 2 words. "Casual
Empirical" And then run.
I love how people suggest to play the cross over the MACD. While generally
it is true to go long when the fast is above the slow, and short when the slow
is above the fast. Many of you know how disastrous that worked out. The
reason it didn't work, you didn't know what is really going on when they
cross over. If you come across someone who will tell you to play the cross
overs without explaining how to do it without killing your account, get the
hell away from them.
Divergences of the MACD are awesome to play, but again you will need to
understand what the market is doing and why even on negative divergence,
the price is still moving up. Well because the fast is above the slow is not
gonna cut it.
So in closing the only use of MA's that I like is within the MACD. It takes a
lot of study to understand how I use it, but I've given enough examples in
this website to guide you. Casual Empirical is lazy. Think like a quant and
learn what the underlying really is.
Issue 24/89 - The Way Things Are
MMs, Institutions, and Retail
By now you know how I hate funnymentalist with their news and
conspiracies. It is a real sad disease a trader gets by not wanting to truly
learn. Instead they rely on drama and romantic notions about how markets
move. It is a lot easier than looking for the truth. It is very hard when you're
fed by the media and lot of "gurus.” Regardless, we hope to correct some
misconceptions and try to get you to understand the order of things. So here
is my stab at it.
Market Maker Investopedia.com Definition - A broker-dealer firm that
accepts the risk of holding a certain number of shares of a particular security
in order to facilitate trading in that security. Each market maker competes for
customer order flow by displaying buy and sell quotations for a guaranteed
number of shares. Once an order is received, the market maker immediately
sells from its own inventory or seeks an offsetting order. This process takes
place in mere seconds.
The market makers play an important role in the secondary market as
catalysts, particularly for enhancing stock liquidity and, therefore, for
promoting long-term growth in the market.
Institutions Answer.com Definition - An institution that acts as the
middleman between investors and firms raising funds. Often referred to as
financial institutions. (banks, hedge funds, mutual funds, insurance
companies)
Retail Investopedia.com Definition - Individual investors who buy and sell
securities for their personal account, and not for another company or
organization.
I am a retail investor. I am not a bank or a market maker. More than likely
you are like me.
Market Makers provide liquidity. They post bid/ask to facilitate the trade.
Market Makers are required by law to provide the best bid/ask price for
market orders. Since they also guarantee their prices for a certain quantity,
they must honor it regardless if it is favorable for them or until that quantity
they offered is consumed. They are responsible for matching buyer for every
sell and a seller for every buy. And somehow, they are considered the bad
guys. So when you aren't getting filled at your price, it is because there is
none available at that price. Enter the "Specialist.” The specialist is an MM,
who takes your order and holds it until the price of the security matches your
price. He tries to get you fair pricing and must address the customer's orders
prior to his own. Why do people think they are the bad guys again?
Institutions create trends.
Between the institutions, market makers and retail...who gets the news first
and who gets the news last? And who will make up the larger volume of
trades between the three?
Market Makers and large institutions get the news first, retail almost always
gets them last. So who has a clue on how the market will move? But does
this put the retail in a disadvantage? No!! Because institutions make up the
greater volume of buys and sells, they create the trend in the charts that you
see. Retail generally follows the trend. Well save for the funnymental retail
traders. They don't really read the charts. They rely on news to react. The not
so savvy retailer ends up buying at the top and selling at the bottom. So in
order to set up the trades, institutions allow the market to go up and set up
the distribution stages of the market by getting the retailers to buy while they
sell. Why are they selling? Taking profits of course! And shorting the
market. To set up the accumulation, Institution get the retail to sell while
they buy. Why are they buying? To profit from their shorts and to buy low.
The tech savvy trader and scalper always get in the beginning of the move
because they understand how the market moves. Because they see what the
big boys are doing.
Issue 25/89 - Occam's Razor
Occam's Razor
"Entities should not be multiplied unnecessarily."
A more popular expression of Occam's Razor:
"If you have two equally likely solutions to a problem, pick the simplest"
There are many ways to invest in the market. There are many ways to read a
chart. There are many ways to profit from the market. Many employ various
strategies and profit. But when it comes to execution and arriving at the
decision to enter a trade, people employ myriad methods to rationalize their
trade.
Fundamentally you can look at the company and determine whether or not it
is a winner or a loser. But fundamentally Lehman looked real good but the
books were cooked. Fundamentally, and historically Lehman was a sound
investment. Long-term investments can be profitable. However, technically
played swings and or scalps can reap higher profits than long-term
investments. Many people try but few really get there. In the end they over
trade and lose many of their gains if not all. At the end of the year, many are
satisfied with 3% gain. Obviously there is an issue with their execution and
selection of their trades.
Occam's razor would have us remove all unnecessary theories that just
complicate your decision-making. And one of the simplest ways you can
trade is to note accumulation and distribution. Markets move in cycles. You
would be hard press to find an honorable professional analyst who would
contest this notion. Significant price movements upward require the market
to accumulate. Significant downward price movement requires the market to
distribute. You don't need to have super fast Internet access to get a head of
the market. You don't need to hack into the market's servers to take
advantage of these movements. You don't need a super algorithm to exploit
ticks. And you certainly don't need insider information.
What you must simply understand is that any heavy buying and or selling
will propagate in your charts. There is no hiding it. The difficulty comes
when people read charts. They fail to employ comparative analysis.
Comparative analysis allows you to determine what the long-term
accumulation/distribution (accu/dist) targets are, and how they relate to the
intermediate and current trend.
You don't need to employ fibs, pivots and other technical studies. The price
action alone demarcates the levels of interest that will act as support and
resistance. Price levels are simple to identify. Price levels are easy to
understand. But because of long history of misinformation. People consider
it too easy to be true. It is difficult to understand why people enjoy
complicating something that is so simple.
Generally, the target of accumulation is the last lost support and overcome
the previous high. Generally, the target of distribution is the last strong
support and overcome previous lows. On the way up or down, when
encountering a strong level of support or resistance, it will fail on the first
try. Many books you read attest to these simple rules.
How do we complicate it all? We employ guru tools. Guru magic chart
patterns. We employ 16 redressed indicators. There really isn't anything
wrong with many of these things. The only thing that is wrong is that we
resign to them instead of fully understanding how the market simply moves.
Yes the common indicators are not so flashy and they have limitations. But
the limitations to those indicators vanish when you learn to read them across
complimenting time frames. But a sound understanding of accu/dist, you can
do away with indicators entirely, because you can relate the price action.
This requires study. And it requires you to empty your cup. Simplify.
Issue 26/89 - Time Machine
If you could stop time and inspect what is coming and get an idea what the
market will do next, would you gain an advantage? Obviously, if you could
see tomorrow’s paper today, it would be better, but that would be cheating. If
you could gauge what is going to happen by stopping time to give you an
understanding of the trend without cheating would you?
Well to tell you the truth, you already have that capability. Some people use
it but don't realize what they are really doing. Some people just refuse to use
tools that are already available to them. Some people think they need to hack
the servers to do this. How dumb!! It just shows you how stupid a bunch of
geeks can be when led by greed. Some people are stuck in time and only use
1 chart. Now you can get by with one charts just fine but if you have the
means to analyze what is coming and then be able to gauge how it will affect
the current trend why would you limit your-self? If it is there, use it if you
can gain an advantage right?
Can you actually grasp what stopping time to inspect what is coming means?
Imagine a faucet turned on to high as you are filling up the bathtub. And you
want a perfectly warm bathwater. (BTW this is a magic bathtub where
entropy is not a factor. Ergo hot stays hot. ** The point is what is already in
the tub cannot change. Change comes from what is coming in.) In order to
make this perfectly warm bath water, you would like exactly 50/50 ratio hot
to cold. If you could stop time and see exactly how many hot water and how
many cold-water molecules coming in, you could relate that to what is
already in the tub. If you could get that granular information about the water,
you could slice time more and more, so you can count how water is filling
your tub in 1 sec, 1min, 10min, or even hourly increments. I wonder how
kewl that would be.
Each slice of time will represent a finite amount of water expanding out
from the point the water comes in to the tub to encompass the entire tub. It is
like a series of concentric circles each with its own picture of hot to cold
ratio. It would make sense what you would look for when doing comparative
analysis. Each contributing to the make up of the water as a whole or as part
of a shorter time slice. If it helps you any, imagine the series of concentric
circles as a series of buckets inside of buckets. You would see how things
can change from shorter time slices and see how things lead to the trend or
how the trend develops. I wish I had such a time machine!!
But then you would say, well that sounds really kewl and geeky but I'm not a
math wizard. I'm really a mental midget. Now what if I represent each of
those buckets graphically so you can make decisions. Maybe some line
graphs or hey what about candles that turn blue and red if it is mostly cold or
hot. And maybe some oscillators? Would that help?
Just a thought. Perhaps if you watched enough Star Trek like I did, you
might be able to understand what I'm alluding to. Imagine the type of
analysis you could do if you had such a time machine.
Issue 27/89
Kewltech skipped this issue.
Issue 28/89 – Consolidation
Hey it’s been a while, I took a little break and starting to get back into the
game again. Anyways, MentalMidget and I were chitchatting and we were
talking about charts and some stuff we hear every time. One of the most
ambiguous words I hate is the word "consolidation.” You hear it all the time.
The reason I hate this term is because people resign to one thought. Always!
When they see consolidation. When they talk about consolidation. There is
only 1 and only 1 thought in their minds.
"The market is still trying to make up its mind"
How incredibly inaccurate!! How incredibly useless assessment!!
What it does is leave you to resign and say you don't know what will
happen. One suggestion. Get rid of that term from your mind other than to
describe the candles bunching up in a same price range. Nothing more.
If there is something you can gain from "consolidation", you should
determine 1 of 2 things. Am I accumulating or distributing?
I totally hate that word especially when people make it a reason to stop
thinking. They wait for the "market to decide" and when it does their
analysis is after the move is already done. Oh it moved because we had
negative/positive divergence. But the determination is after the fact. Useless
to you because the move already happened.
Consolidation is NOT the market "trying to decide.” The market already
decided!!!
If you noticed, each example of consolidation, they are sites of accumulation
or distribution. The momentum was already indicating the direction the
market would move prior to when the "market decided" to move. And where
did each accumulation and distribution go? If you really want to know. If
you really do! Go read my blog entry on accumulation and distribution. No.
I'm not here to hold your hand. Figure it out. Everything is so basic. If you
have problems putting it together. Get out of your way. The chart above
shows how it works.
When you talk to your-self, talk to your-self in a manner that empowers you
to make a decision.
Sorry for the spelling mistakes. Guess I was having issues with my "d" key
and didn't notice.
Issue 29/89 - Not A Glitch
You can understand how people are confused. Too many misinformation
spread by "experts.” Consider who supposedly also chimed in with Geithner
on "computer glitch.” I really don't know. I don't watch Cramer. He is as he
agreed with Comedy Central, a snake oil sales man.
Who is more believable?
A more level headed and correct view was issued by Marc Farber in his
Bloomberg interview. He said the market went up too high too fast. Through
a more technical view that goes in-line with accumulation and distribution,
we went higher and higher on lower bullish volume ergo Distribution. Those
in the know, knew it would go down. The markets were trading on very very
low bullish volume. Ben Lichenstein was interviewed in CNBC, weeks
before talked about how sellers during that time were not engaging.
Technically as a market profiler, Ben understood the build up of bearish
momentum back then. Since when has this been going on? If you look at a
weekly view, you should notice the bears have been building up since Oct.
09.
As you examine this daily chart, what do we have? Distribution. And where
did the price go? Go read the blog entry on Accumulation and Distribution.
Another interesting view coming out from the "experts" talk about how the
government wants to tax the "high frequency" traders because they help
cause this situation. Who are the market makers?? What was significant
before but not so today, are the hedge funders. Many hedge funders were
wiped out in 2008 or consumed by larger companies. The ratio of volume of
retail to institutional traders still goes to institutional traders. So why blame
the retail? Misinformation. Who is buying the rationalization? The all of the
sudden "economic expert" elected officials. Computer glitch!!
Meredith Whitney (sigh) addresses these issues by saying such laws are
“reckless.” The issue is really this. How often do you hear the word "bet"
when talking about placing a position into the market? They consider it a
gambling situation. Considering all that we already know that the market for
those who know how it really works, it is not a "betting" situation. Farber
also dismisses this notion that high frequency traders are causing the huge
drop down. He explained that most of these computer based trading are
momentum trades. Legislation to tax the traders is based on faulty thinking.
These government officials have no clue. Computer glitch my foot! Sorry
Timmy. Get a clue! That alone shows you how they have romantic notions,
funnymentals, about how the market truly works. "Reckless.”
Those who understand momentum and true technical analysis do not bet.
They play what is before them.
This charts shows you how the market volume bars are generally more
bearish as we go higher and higher. Huge distribution pattern here. In this
chart, you can see that the bears started to accumulate since late February.
There is no bullish volume here propelling this rise in price. This is not
something you get excited about. This is not a healthy bullish run up. When
market goes up on ever decreasing bullish volume, there is a single chart
pattern definition you can think of. A bear wedge. There is also a
mathematical consideration. If you are going up on less bullish volume, what
is increasing? Bearish volume.
Askbucky's chart
Thanks Bucky!!
Issue 30/89 – Fundamentals
Today I had some time to watch Bloomberg on TV. Yeah I do watch some
news from time to time. And it really hit me what and who really uses
fundamentals. For us small fry, we can rely on services to provide us with
some of the info, but realistically, unless you have the means to understand
the industry, the accounting and whatever else that is included, then really,
fundamentals is useless to you. Don't get me wrong. Many people are able to
trade successfully on fundamentals. I'm sure there are. But who would know
everything about the fundamentals, government policies, events and the like
and piece it all together than the market makers? Back to idea of resources.
They have the resources to gather all that information.
Peons such as us only have Cramer, CNBC, sexy Fox and Bloomberg and all
the other services. The problem is, they are always late. Early this morning
on Bloomberg, a headline read to the effect that the American futures rallied
on rosy statements made by Bernanke on the economy. Later on that
morning, market drops. The headline disappears and replaced by Bernanke’s
statement about employment. I love reading the headlines in the news and
watching the news before the market opens. Almost always, when the news
reporters are excited very bullish, it is the time to start shorting the market.
And when they are gloomy, is when you should consider going long. Sounds
comical, but most often true.
Ever given thought to the Goldman accusation, that when the company was
going short on some stocks, they told their customers, well "recommended",
some of their customers to buy said stocks. Please buy this stock because we
are exiting our long positions to go short. We will provide the liquidity you
need to take out all of our long positions. I don't know if that is how they
decided things would work, but that is what is necessary for a distribution to
happen based on bad fundamental findings on whatever entity will be traded.
As the news breaks about the not so rosy fundamental aspects, the market or
stock is primed to drop.
Now back to the main topic. Fundamentals.
In all truth, the basis for the market moving the way it does is truly based on
pure fundamentals. Market makers and large institutions are responsible for
setting up the market for whatever it does. Since they buy and sell just like
we do or make available the necessary liquidity to move the market one way
or the other, we can track what they are up to from our charts.
We poke fun on the funnymentalist traders out there because they always
talk about the news. How this news made it drop, and how this up and
coming news will make it pop. Really, when they talk about the fundamental
reasoning behind it, for the most part we cannot disagree provided it isn't
some red neck explanation. We feel sorry for them because, they don't get
that the setup for the resulting pop/drop, was predestined before he even
heard the news.
What is a red neck explanation?
The economy is going to tank because Obama is a socialist.
Why is this a red neck explanation?
Democratic party usual platform is based on social handouts. To make it so
that it is specific to Obama is red neck. People usually elect the democrats
when there is an economic issue because they want to make sure they get
some government help. Not usually a republican stance. It is what it is. Some
of the pictures of Obama and stories that are circulating in the Internet are
beyond red neck. I remember back in the last presidential election on Good
Morning America. A lady was asked if she would vote for Obama, and she
said, she wouldn't because he isn't even American. ROFL!!! Can you believe
that!?!
The decline really started back in June 1, 1999. Now based on buckets, who
has control of the market right now? Now consider the fundamentals. If the
economy is turning for the better, what is necessary? People will have to
have a lot of disposable income. In order for that to happen they have to
have jobs. In order for that to happen, companies must be able to get loans to
get money to hire and have someone to sell to.
Has any of the required been met since the market popped rapidly from
March 09, lows? No!!!
Now, I'm not an economist by any means. I've only had the standard
Micro/Macro economics classes, however, one can deduce certain things that
comes to play. Since the 90s the world has become a much smaller and
connected place. Products arrive from any place to anyplace. Third world
economies receive influx of companies to help educate and build their
manufacturing and production capabilities offsetting labor cost in originating
countries and keeping competitive advantage. Everything sounds good so far
until you notice the trade deficits. Why is there a deficit? Although by
moving manufacturing to underdeveloped countries, we help increase their
output, however, their economies are still unable to purchase our own
products. Supply is high. Consumer consumption globally is lower. I'm
leaving it at that.
Technically what must happen in order for the market to return to
bullishness?
We need an accumulation to start up. We would require the market to
produce a failed new low or new low on more bullish volume. What price
are we going to test? March 09 lows, the previous low. For a new low, it may
take us down to 477-456ish in this SPX monthly chart. Scary!!! After that
419/20 then 385/86 yikes!! So what do we know about the market when it is
so one sided. When they sell. They sell. My lines may be a bit off. My
allergies are so bad, I can't have my contacts on and too lazy to look for my
glasses, but I think I'm in the ballpark. A technical perspective.
It would be nice if we stayed above 900 on this next drop down. Facilitating
an accumulation from that point on, but the bulls must not allow it to dip
past the previous MACD low. The weekly not comforting either. Nothing
showing turn around. If we do pop, we will just form a triple top. I hope I am
totally wrong.
Issue 31/89 - Two Bar Reversal
In my group, we call these tubas, as per Mental Midget. Two bars was
introduced to me in myriad books I've read but never clicked with
significance till my chart analyst mentor AskBucky showed me what they
are. 2 Bars are best viewed by using bar charts. They are commonly
described as railroad ties. In Nison's terms, the 2 bar is generally a
bullish/bearish engulfing pattern or a candle combo like a piercing or a dark
cloud cover. Regardless, the benefit is understanding how it is formed.
Essentially 2 bar is a reversal signal. Along with 3 bar reversal. The mistake
is that people generally think that they happen too fast to be able to play it.
The other issue with 2 bar reversals is that it needs confirmation. A good 2
bar reversal cannot have its 2 bar'ness violated by the adjacent candles.
Why? Because it loses its distinctiveness as a 2 bar.
Here are a few examples of 2 bars in Goldman. What is more meaningful is
how 2 bars are formed. AskBucky taught me to look at how the 2 bar is
represented in other time frames. This was a great tip. Because it didn't allow
you to stand idly by trying to wait for confirmation as the 2 bar forms. While
you are waiting for it to form and get confirmation, you could lose the bulk
of the move.
For instance lets take a look at the weekly 2 bar of 10/5-10/12. These 2
candles produced a 2 bar reversal signal. When we look at this from a daily
perspective. How was this 2 bar formed?
Here in the daily in the yellow, I've bracketed the days that produced the 2
bar of the weekly. The oval is where this 2 bar was defined. But what is
more significant is the overall chart pattern here in the daily that helped
define what the 2 bar reversal will actually do. As you should know, the 2
bar signals a reversal from bullish to bearish or from bearish to bullish. After
this pattern, you should have a continuation to the price action to create the
full effect of the reversal.
So what we have here is a type of HnS pattern. As you can see in your
momentum reading, you have had a build up of bearish momo since back in
late July. By understanding the lower time frame action, you can determine
how it will form a 2 bar and if the 2 bar will be confirmed.
Hope this helps you JB.
Issue 32/89 - When Trends Collide
Understanding the trend can get confusing. Especially if you are only
looking at short term and completely discounting the longer term trend. The
other problem comes when the momentum of the short term seems more
bullish or bearish and the longer-term which is showing the complete
opposite. The ensuing result shows up in many occasions as failed chart
patterns. And failed chart patterns can be unforgiving when you are in the
wrong side of it. The mistake could have been prevented by understanding
the longer-term trend. Because it was completely discounted, a strong bias
was formed.
What is the technical reason? Longer-term trends will always overrule shortterm trends. Many people entered Sunday 6/20/10 and then Monday 6/21/10
morning's market with so much bullish bias. In one of the chat rooms I
frequent, some funnymentalist were calling for 1200 on the ES before
Sunday night would be over. People have to learn to read charts. People have
to understand simple technical analysis.
The bounce from previous lows took almost 3 weeks to set up on this daily
chart that brought us up from 1032.75 to current high of 1129.50 on 6/20. If
you were only looking at the day candles you would be mistaken in thinking
that from 6/15-6/20 we were going to try to go further up.
If you just ignore the candles above or ignore the current candle, could you
say with all honesty, that there is a lot of momentum to the upside? If you try
to appreciate the failure of the close of the 6/14 candle you would also
understand from a levels perspective that this red candle would follow.
Oh no, this is all due to the news!
I won't argue with you on the news aspects. But you do know what I say. It
can't pop or drop, without it being setup to do so.
According to this chart, it started 6/10 to build up the negative momentum it
needed to drop the market. By the time we hit that high, we would be
describing that pop on negative divergence. The after the fact people all
called HnS!!! The conditions were there before it formed.
And if you consider the length of time the 1hr took to create this negative
momentum, it eventually affected the 4hr. The confirmation before we even
reached the 1129.50 high, was already set in stone by the 6/15. This is
comparative analysis. You can't be surprised by these moves if you employ
these methods.
If you consider the currently weekly status. What is it suggesting to you? We
will see a pop sometime soon but we will be doing it on more bearish
volume and so a correction will follow.
Issue 33/89 - Stop Losses Don't Work!
In a recent comic relief session in a chat room, someone said Stop losses
don't work because the MM's just takes them out.
MM 1: Hey look that dummy just put on a stop.
MM 2: Hey I have a sucker here too
MM 1: I’m so glad we have this "Sucker Just Put On A Stop" alert system
MM 2: For sure! our lives is more exciting
MM 1: Ready to take these dummies money?
MM 2: K A C H I N G!!!!
MM 1: WEEEEEEEEEEEEEEEEEEEEEEEEE!!!
MM 2: Let's call Obama next so we can pop it and drop it hard soon as best
bud pres gets on
MM 1: Yeah lets do it after lunch
It is highly conceivable that these poor blokes, the market makers, are
targeting people specifically. I have to wonder if they are off shore contract
workers. If we could get those jobs back here in the states, I bet we would
resolve our economic issues.
Motivational Quotes Hanging In MM Cubicle:
A Sucker Is Trading At Every Tick Blow Their Stops
Surely, my stops are being blown, are the maniacal workings of the evil
MMs!! There is no doubt about it! "They" are personally and unfairly
targeting me. So I no longer put on stops!! I only cry like a little girl when
I'm working through a 30pt draw.
Mystery of Setting Stops
Here is how I set my stop. I see a price. I think it will go up from there.
Nothing specific. Just up. Yeah you heard me. Then I decide how much pain
I can stand. And voila! A stop is set. If you don't like how I do's things, you
can kiss my big double bottom!
Yeah, you know that is what people tell you how to set stops. The amount of
pain you're willing to endure. Sounds scientific. Sounds like it makes sense.
Sounds extremely logical. Hey! I'm willing to lose 2 pts. It’s only freaking
money. Who needs it.
The wonderful thing about setting stops is that they usually get blown by
like 1 tick. And then completely reverses and goes your way if you were
only in the trade. O I love how that happens. The memories of yelling
profusely at the computer.
When you set a stop, you must fully understand where you are in the move.
Ideally, you would like to go long at support, short at resistance. And yet in
our haste, we forget that little thought and we short at support and go long at
resistance. And with much certainty we declare. "Dang MMs did it to me
again!!!"
The best way to get blown out of your stops. Chase the trade. OMG it is
going up!! Should I go in? Dang it’s going up more!!! Buy market now!!!
WTF!!! Go up not down!!! NO!! NO!! NO!!!! Not my stop!!! ((scalpersue
exclaims with much fiery emotions)) "Don't you dare blow my stop!!! Or I'll
be pissy!!" Market resumes to move up. "Curse you MMs!!!!"
The Solution
I've covered some general instructions on setting stops before in Issue 014 Setting Stops. It was just amusing listening to the comics in the chat room
and seeing how many clueless people there are. Our next issue will cover:
Can you tell me what time frame I should use so that I wont get emotionally
constipated? LOL NOT!!
Issue 34/89 – Trends
What is amazing is the number of people celebrating when the market hit the
1216.75 high. I remember watching Bloomberg and listening to some guy
talking about 1300. The reason that guy gave was so way off, you saw dung
beetles crawling all over him. I can only imagine what the comics at CNBC
were saying. It was sad to see that these so called "professionals" would be
so bullish.
I love the statement about people not being able to see past their noses.
Really is the case when you try to understand why the market moves the way
it does. Too close to the trees to see the forest. Oh and another cliché. Some
people can't think that far. Mind you, I'm not poking fun at you. Just trying
to make you aware of a symptom. So lets figure out the all-important
question. To what force is price really subject to? Is it the long-term trend or
the short-term trend?
The pop up to 1216.75 is a great example. People in the short-term time
frame never really understood why the ensuing sell off occurred. It was
shear folly to expect it to go to 1300 from there. If your broker told you to go
long. Fire him. If your trader pal said told you to go long, he isn't as hot a
trader as you thought. And if you thought that you should go long, you
might be a red neck. If that is truly the case, you are blaming the
government, because the news may have tied it to a government
announcement.
The people who told you to go long or if you thought to continue to go long,
failed to understand the trend all together. Failed to see negative divergences
in the daily and the weekly. People generally see the price up and have no
clue what is actually developing or has been developing. Then they are quick
to blame anybody but themselves for their bad trades.
If you examine the daily chart, the daily was going sideways since early
April to May 3. Since Aug 5, 09, the momentum to the upside has been
fading. Distribution and negative divergence. What a nice combo!
Fat finger day occurred.
Issue 029 - Not A Glitch above discusses the technical merits of the move
down. The real power behind the move came from longer-term view.
Now look at this same action from a weekly perspective. Although the daily
started in Aug/09, the weekly only started to confirm the lost of momentum
in Oct 09. The progression of the relenting momentum, finally affected the
weekly. And on that new high, you can clearly see the negative divergence, a
new high on lower MACD. The weekly continued to progress weakly as
well, and then finally, affecting the monthly, who up until May was strongly
bullish. Wow look at that monthly!! There is this trader in one of the chat
rooms, who consider him-self as an authority, declared that an ascending
wedge is bullish. If it is, then no wonder some people had such bullish
expectations. In Bugs Bunny's immortal words..."What a maroon." Perhaps
all these people went to the same funny mental school.
It really doesn't matter if you are trading in the daily, weekly, monthly or
133tk, 1600tk, 15min or even 30min, 1hr, 4hr, the basic rule applies. The
longer-term trend always over rules the short-term trend. In the same way a
short-term trend pops up after selling off and then retests the previous lows,
so must a longer-term trend. The only difference is that the longer-term trend
takes much longer of course.
Since the Mar lows of 09, people thought that the market moving up, in the
strength that it did, could only continue to go up more. Hopium addicts
wanted it back up to 1500. What explains the strength of the explosion from
the lows? Would you believe an accumulation, clearly seen in the weekly is
responsible for this pop up? Can't see it? It started just before Dec 08. And
the new low of Mar 09, finalized the move.
So here is what happened. People whose vision can only go as far as their
noses. Did not pay attention to the longer-term trends, to see that the
monthly reached a significant level. This level was established back in June
05. Wow that long ago? Yes!! We retraced back up to previous support we
lost. Isn't that the target of an accumulation? Of course it is! And as usual,
we say that the shorter time frames, will show you the changes first. When
did the daily and weekly start to put on the breaks? Ergo, failed to close
above that previous support in the monthly perspective, end of move up.
You are always subject to the longer-term trend whether you like it or not.
The price can fluctuate all it wants so long that it accomplished the goal of
the longer-term trend. People can blame whomever they want, the
government, the economy, or currency issues, etc. The fundamentals
globally had already set the technicals in motion. How can we avoid the
technically inevitable retrace down to potentially lower lows than 09? Call
everyone you know. And tell them to tell everyone they know. Tell your
mayor, governor, and even your president. Help the economy in this way.
Buy up this market in large quantities. Although this pop up to 1200+ was
impressive, we did so on very low volume. This is the mathematical reason
we are facing strong fat finger drops or “computer glitches.”
There was no real bullish volume to offset the bearishness Change the
picture en mass. What will buying en mass achieve? A new low or failed
new low on more bullish volume. Resulting in.... accumulation.
Issue 35/89 - Momentum Progression
Momentum progression is something people have a problems relating the
market movement to. Progression as in continuation of bearish or bullish
divergences. The issue really is determining what those divergences really
mean and how does it relate to the price action and to do in real time.
The main problem is real time assessments. Some people really have no clue
how to relate time frames to stitch together the price action and even
momentum. Some people have a flawed understanding of oscillators. They
know what a certain divergence looks like but have no way of understanding
how it relates to the price action. This is another topic of discussion all
together.
What is momentum progression?
When reading momentum, you must understand if it is strengthening or
weakening? How does it relate to higher time frame? Is it affecting the
higher time frame in the same manner or is it being absorbed?
Lets revisit the bucket analogy. If your 133tk chart is looking like it is
building up bullish momentum, but your 1600tk or 5min is still highly
bearish, you can easily say, that the 133tk bullish build up is being absorbed.
Your price action would follow the 1600tk or 5min chart. The 133tk chart
represents a tiny bucket. It may sow your momentum go up and down like
crazy. In order to see what it is really doing, you look at a larger bucket like
the 1600tk or 5min chart. Between the small and large, which will have a
more true representation of the momentum or trend? Yes, the larger.
Why is my price continuing to go down when my momentum is trying to go
up? It’s like applying your breaks. You wont go to a full stop till you build
up enough force to do so. But if you broke down your elapse time, and
notice the speed dropping for insignificant amounts to significant amount,
the change in momentum in the 133tk, is why we say that, you will notice
the changes in your lower time frames first. Will the car stop at this point.
No, it still moving and so will the price.
Although the price continues to follow the trend, the 133tk build up of
bullish momentum continues after some time, that the 1600tk momentum
begins to turn bullish as well, you are starting to see confirmation. Your
price action should start to move sideways.
Why does the price action go sideways? Because now those breaks you have
applied and continued to apply, has started to affect the speed so
significantly that you slow the car down. Is the car still moving forward yes.
Because you have not come to a complete stop. The amount the price can
continue in its current direction is limited.
The next thing that will happen in time is that the 5min will turn up as well
causing the 10min, etc. etc. This kind of progression does 2 things:
1. Offsets bearish volume (in this case) with bullish
2. Causes a potential change in trend
Depending on the time frame you are viewing this kind of action is repeated
in the smallest time frame which can turn around in minutes or seconds, to
days, weeks and years. Regardless the whole process will happen in all time
frames over and over again.
When you reach a price, for example a revisit of the previous high/low, you
want to ask, was I more bullish/bearish then or now? A really important
question to ask. Because if you are bearish, you must really consider to short
before it drops on you on the new high, or go long immediately if you are
more bullish on this new low.
I'm not going to share any more charts on this concept. There are plenty in
the blog already. Yes, seriously, it is that simple. And yes again, we are
describing Accumulation and Distribution.
Okay I'll share 2 charts:
Bearish Progression
Bullish Progression
Special thanks to OptionGal who saved these files that I lost.
Issue 36/89
Kewltech skipped this issue.
Issue 37/89 - Time Shifting
Bullish Time Shifting is understanding what time frame has current control
of the trend. The difficulty of trading is knowing how to use time frames to
your advantage. As we've learned thus far, you want time frames that are
complimentary to each other in detail, from low to high. And that price is
always under the influence of the longer time frame trends. What does that
all mean?
Complimentary Time Frames
Complimentary time frames are critical for scalpers and for any other trader
for that matter. It allows you to not only see, but also understand the near,
intermediate, and tertiary trend. You want time frames from low detail
(longer time frame), to high detail (lower time frame). Why?
Longer Time Frame Controls Price Action
Price as we know is always under the influence of longer time frame trends.
Many will say, "Well I understood the trend, I went long (or short), because
the longer term trend said it will go up, but then the price went the complete
opposite and blew me out before going to my target.
It really doesn't matter if the person was scalping or playing a longer trade.
This scenario happens all the time. It isn't because the person was wrong in
the direction of the trend. It is just because of execution placement. Let’s
take a few examples.
From this daily chart we can understand by 7/1/2010, the accumulation has
been set. Since we understand accumulation is set, we know to go long.
Longer-term trend is set. Not a bias but a completely sound technical
understanding. Low detail perspective.
Low Detail
What does that mean low detail? It took 1 whole day for these candles to
form. If you went long inside or even at the open of these candles from 7/2
and on, would you safely say that you would not suffer a draw. Just take a
look at the range of 7/6 or 7/7's candles. This is what people don't account
for, it is how the candle will form.
What can we understand from this chart then? 2 things:
1. Momentum is set to the upside
2. Accumulation based on price action is set and we expect the
price to move up. The move is going to the previous support
lost. 1070.50 then to 1090.75 then to 1110.75, provided
momentum holds up.
Will these movements change the trend? No. It may but not until it reclaims
the previous support lost back up at 1192.50 and then pass the previous high
at 1216.75.
Moderate Detail
When we investigate further into this potential accumulation play, it seems
that today. We may see 1092.00/75. Achieved more detail than the daily.
And momentum is starting to turn.
More Detail
To get there we need to break through the levels at 1086.50, then 1086.50,
1089.25 and hey we may even get to 1095.50/75 for the huge inverse head
and shoulders.
But what we are also gathering is that momentum has slowed and is setting
up for a correction already. What are those levels I mentioned? They are
spots to look for resistance. Some are not major levels and some are. If you
play them against the tick charts, you will notice how significant they can
be.
Longer term, we are under the influence of the daily trend to go up but as
you know, the market doesn't really travel in straight lines. It zig zags it way
up. From low to high details, you gather the longer-term significant levels,
and then you break down the action to understand what are the levels inside
that range that will affect the price action.
The more the details you get, you can limit the draw down you would
potentially experience by not going long at resistance and then short at
support when you based your trade off a longer term perspective.
Time shifting dictates you go from low detail (longer term time frame) to
understand the move, and you shift to high detail (shorter term time frames)
to get your entries.
There is a lot more I can say about this topic. I think, I've given you enough
to extrapolate the rest. It is up to you to think through them.
Issue 38/89 - Entries And Exits
Entries and Exits are tough to figure for most people. The general rule is
long at support, short at resistance. The problem is many wait for
confirmation of the move so end up going in at the middle of the move or
sadly at the end of the move… Sound familiar?
There are 2 things you can do to avoid this.
The first solution is to understand the momentum. Momentum will start to
fade before the end of the move. If the momentum fade in the lower time
frame has been sufficient enough to affect the momentum of the higher time
frame, your move is about to end.
The second solution is to understand the level of interest.
The accumulation causing the price to go up has a specific target. The
support it lost for the sell. Level of interest for accumulation.
The distribution casing the sell off also has a specific target. The support that
allowed it to move up. The level of interest for distribution.
This tutorial is now done.
What you expected more? It’s as easy as that. By understanding what is
causing the market to move one way or the other, you will understand where
you are in the process and select the best places to go long or short. You will
use comparative analysis to ensure that you will choose the shorter time
frame to enter in a good phase the price action is currently taking. What?
Well if the move is 20pt move. It generally will not do it in a straight line.
There will be series of accumulation and distributions in lower time frames
to achieve the larger accumulation distribution. Thus the candles with long
bodies and wicks.
Have fun & enjoy.
Issue 39/89 - Beware of the PPT
OMG!!! Here is an example of a little knowledge is a dangerous thing. Many
moons ago, when the market does something completely unexpected, people
blame the MMs. Now they blame the PPT.
Who are the PPT? They are a group of people who will try to save the
market or slow down a sell off. This group was instituted way back by Pres.
Reagan in 1988. This group is known as the Plunge Protection Team. It
consists of 4 people that include the Sec. of Treasury, Chairman of SEC,
Chairman of Board of Governors of the Federal Reserves, and the Chairman
of Commodity Futures Trading Commission. The group's name says it all
about their function.
What is ridiculous is how people think they are there to affect a complete
reversal without them knowing it. That it will happen instantaneously.
Erroneous!! Any transactions that take place to affect the market will show
in your charts. The problem with some "traders", is they rely on news but not
their charts. They are also stuck correlating events and things that doesn't
even have relevance.
Can this be the infamous PPT in action. Setting up for the resulting pop here.
Seems like some bullish tones to help apply the breaks to this drop. This
sustained effort from before 8 AM EST led to the 1600tk to follow suit. It is
just so strange how people hate to follow what is already before them.
All that work the 133tk took, finally affected the 1600tk to help form what
we call .... Accumulation.
So many "traders" were waiting for the news. Speculating funnymental
reasoning for the move that is expected. But failed to understand the move
being set up the last few days.
Can you say distribution?! I love this one guy in trader chat. He wanted to
test 1100 this morning. No way! Not a chance would that have worked out.
He was lulled by a potential inv HnS. But failed to see the HnS that formed
due to the distribution.
PPT will do their job. It doesn't happen instantaneously. It must be
technically supported. Stick to the charts and get educated about how
markets move. It is a lot easier than you speculating on fundamentals and
government announcements and news.
Issue 40/89 - Fundamental Vs. Technical
Analysis
Fundamental and Technical analysis are really 2 different styles of trading.
The problem arises when people who are day trading think they can use
fundamentals to help them in their swings or scalps. When fundamental
traders get shaken out by the intra-day volatility, not realizing that, for their
longer-term outlook based on their fundamental analysis, the intraday zigs
and zags are only noise.
If you are scalping the ES and you make decisions based on fundamentals,
news, economic outlook then you are definitely royally discombobulated.
I'm being nice. As funny as it may seem, you can go to just about any chat
room and see people commenting on the news, the government, the earnings,
etc. etc. on why their scalp failed them. The fact of the matter is, the people
who are trading daily, are trying to be day traders, scalpers. They just don't
know that the basis of their thinking is flawed. The scope of their analysis,
should be more technical rather than fundamental. Many of these so-called
investor are looking for a quick buck. A get rich quick scheme.
Fundamental Analysis:
You will consider the financial reports of the company. You look for longterm profit projections. You will consider its leadership and you would like
to invest not for quick gains but for longer-term profits. Fundamental
analysts like "investments.” You generally want to buy something up. Talk to
any layperson. Ask them about what they think investing is and they will
talk to you about the fundamentals. And who would they like to be? They
would like to be like Warren Buffet. Your judgment is based on the
company's track record, its financial, its management, its potential to
grow.
Vocabulary of a Fundamental Trader:
What's the news?
Earnings should be positive today.
You must have balls of steel to take a position at the open.
The acquisition of xyx corp should cause their stock to split!
This is a strong balance sheet in their quarterly report.
Technical Analysis
Technical Analysis, requires you to consider the charts to help you identify
the trends and the momentum. You want to identify the levels of support and
resistance. For the day trader, they like volatility. They want high volume
trading days. They want quick returns. Your judgment is based on where
the market will move technically, bracketed by the levels that will
delimit the extent of the accumulation or distribution.
Vocabulary of a Technical Trader:
Go UP!!! Weeeeeeeeeee!! Go DOWN!! Weeeee!!!
The trend is your friend!
The HnS should work out on this divergence.
As you can see, there is a distinct difference between the two schools of
thought. The ineffective day traders, are those who can't distinguish where to
draw the line when making their decisions about their trades. We can point
the blame to many people that influence their thinking: the news, their
brokers, and their guru's. Inevitably the blame is to the person who placed
uneducated barriers that will hinder their ability to make sound decisions by
accepting "expert" opinions.
The Happy Medium
Really as an "investor", you should not only consider the fundamentals, but
you should supplement your decisions with technical analysis. But this is
from the aspect of being an investor. You are looking at longer-term viability
of a company.
Being a swinger, a day trader or scalper. You are more empowered by
learning how the market moves and you consider the fundamentals as
rubbish. Now consider what really happens in a market setting when news is
about to break. If the Market Makers want the stock, the market to sell, they
will make you buy it up. Why? It doesn't make sense or dollars for that
matter, for them to sell their positions when the stock is already weak, like
you as newb trader would. They would rather sell when the market is going
up. So what do they do? Make a distribution pattern and sell heavy at the
top.
To make the stock or market to go up. They will make you sell, so they can
get out of their short positions at the lows and start buying at the lows. Why?
Because it is more profitable for them to do that than when the market has
already popped. Buy low right?!! So they set up accumulation.
Issue 41/89 - Where the money flows
People love correlations. "Traders" love to correlate news, government, yadi
yadi yada....got so repetitive. But there is another correlation that is worth
mentioning. It is the Obama factor. LOL not! It is where the money flows.
This is a correlation worth noting because it is consistent and makes plenty
of sense.
What is this awesome correlation?
Gold (/GC), Oil (/CL), Dollar(/DX), ES (/ES), Bonds (/ZB)
When the money flows from one of these, it will go to another one. Market
goes up. Dollar goes down.
Market goes down, gold goes up, dollar goes up. Oil goes up. Dollar goes
down bonds goes up.
It doesn't always happen as cleanly, however, it seems that when you take
from one it gets distributed in some way to one other four.
How does it make sense?
Well if the market goes up. Fundamentally, you want the dollar to go down.
The dollar going down helps our revenue generating from companies and
establishments outside the states. Also, the products and services we provide
outside the US will become more affordable.
The market goes down. Gold goes up. There is fear in the market for a
recession of some sort. And so instead of investing in the dollar, gold will
retain its value more than the dollar. You may see bonds go up too.
The reasoning is fundamental. The technicals are also interesting to note.
That when one sets up a distribution, the other sets up and accumulation.
ES GOES DOWN
BONDS GOES UP
DOLLAR GOES UP
OIL GOES DOWN
GOLD GOES DOWN
This is how money flows.
Issue 42/89 - MACD Dawgie Style
So there was this kitty person, asking about an oscillator to use to help gauge
volume. And being an eager helpful dawgie, I suggested the MACD. This
rude ... hmmm ... (be nice) raunchy feline. =), proceeded to call me a liar and
said that the MACD is price base. How rude!!! And how stupid!!!
To argue with some one who thinks they are so smart, is really not worth it.
So I will address the issue here.
It is impossible to defeat an ignorant man in argument. ~William G.
McAdoo
What?!? MACD isn't price base?!!?
Hell ya it is!!!
So why is this feeeeeeeeeeeeeline stupid?! Why does a dood call himself
kitty? Does that put him under homo suspicion? Hmmm. Well lets answer
what we do know and care to know. And a cat to be rude that way to a dawg,
is far less intelligent than a cat, with mouth wide open, which frequents the
receiving end of a defecating 5-ton elephant that couldn't find his Imodium.
But I digress.
Why is this newb a boob?
What does the 2nd letter in MACD stand for?
AVERAGE!!!
What does the word AVERAGE in math stand for? Are you smarter than a
fifth grader?
Lets consult a math definition for AVERAGE.
Mean or Average is defined as the sum of all the given elements divided by
the total number of elements.
Sum of what??
ALL the given elements.
What does ALL suggest?
A quantity of stuff, elements to add up ergo sum.
If some of those "elements" that make up the "ALL" is of the same value as
in prices, what significance will that have to our Moving Average?
The moving average will be found at the price level because the
"AVERAGE" will be strongly swayed that way due to the "frequency" of
such "elements" at that value. Is why ma's are often found at levels.
Frequency of elements at that value will sway the price. Average is the sum
of all......blah blah blah. Could you therefore assert, that these elements can
also be described as the volume of stuff?
Now how does the MACD represent volume.
Secret!!! Best place to hide a secret. In front of your nose. For those of you
who trade with me. Not top secret.
To be conscious that you are ignorant is a great step to knowledge. Benjamin
Disraeli (1804 - 1881)
Don't mess with THE DAWG!! kitty!
is that an HnSP to daily target then drop? It’s possible its possible I wonder
what flip-flop gooroo would do
And the result...
And from the daily perspective...
After the fact? Hell no!!!
Issue 43/89 - Expectation Management
Expectation Management
You go through life with many expectations. You start your day with some
expectations. You do your work with expectations. Some people forget that
expectations are not law. People become befuddled by their ruined
expectations. Some people fail to adapt to changes in circumstances and
become paralyzed because their expectations were not met. Traders are big
on expectations. Some pride themselves on the accuracy of their expectation.
Bias
What we are really talking about is bias. Bias can be deadly to a trader.
Many traders will endure much pain because of their bias.
Compartmentalization of the price action through the time frames poses
most difficulty for people. The failure to recognize that price action is under
the influence of larger time frame is part of the cause for many traders’
angst. The levels of significance that larger time frame accumulation and
distribution actions are cleanly defined.
There is this “guru” in chat today who said 1090 would be bounce level.
Declared this before the open. Meaning he would go long at 1090 because he
believes that would be a good support level. Bad bias would have cost you
about 7pts?! As you know we like to see a new low on the accumulation or
failed new low.
Don't you just love parabolic moves. The strength of the market before the
open and before the "news" was very weak. For the market to maintain
1090, would be nothing close to a miracle, considering the supposed news
would like to accelerate the selling, especially from 1092? The short was
clearly the play before the news.
What is also clear based on the 5min and even the 1600tk was an
accumulation play would be in order. The accumulation started with
previous day's low at about noon time which we tested and blew through
today for the new low, which is the more significant level based on the
hourly chart. There were more levels below 1083.50 that were possible
levels. We only considered those due to the longer-term trend's distribution
process. What were these levels coming from below? 1081.25 1077.50
1075.25.
How do we temper our expectations? As you approach each level, you
evaluate, technically, the momentum if it will have more to take you to your
next level. You should see in your tick charts the set up for the fading of
momentum prior to you hitting the target.
What do you call this action in the 133tk? If you don't know by now, read
my other blog entries. The arrows tell you what is happening. Those of you
who trade with me know, that the set ups are clearly visible prior to the
major move. Nothing fancy, price action and momentum.
Issue 44/89 - Doji Magic
I remember back in the day, when I just started to trade, and there was this
video that TOS was showing off because the music video had TOS platform
showing on the screen. It was a pretty kewl video. There was a shirt that was
on the "wife", I think it was Joe Kinahan was on the video. Well that shirt
said something about "Doji trader" or something like that. It stuck to me
because I needed to know what Doji trading was. I didn't have a clue till
really early this year. The final piece of my trading education was taught to
me.
Doji trading is for stock, option and scalpers like my-self. See the technical
style of trading that I do is consistent regardless of market or time frame.
The people who don't know pure technicals are simply speculators. And
most are "fantastic" speculators, key word, fantastic. How do dojis fit into
my trading style? Let’s find out!
Look back to previous Issue 2/89 - Accumulation and Issue 3/89 Distribution articles and let us add dojis into the mix.
Doji Stock Charts.com Definition - A candlestick with a body so small that
the open and close prices are equal. A Doji occurs when the open and close
for that day are the same, or very close to being the same.
Do you know how dojis are formed? Well basically it is formed when both
bulls and the bears agree with the price, as some people might say, or the
bulls and the bears are at equilibrium.
Huh?!!?
Well if you actually understood what that meant then, you are a genius. But
being a quant, I need to know how that actually translates to my charts. Yeah
so if you're a dumb dumb like me, you probably said; "Yeah kewl I get it! Of
course doji. That is kewl!" Somebody do a Vulcan mind meld or something I
don't know what the heck all that meant. Big fake smile. Yeah I get it!
Well here is a fine doji from 9/14/10. Picked a nice day chart because
StockCharts' definition was talking about day. It doesn't have to be day. It
can be 1600 tick or whatever time frame.
Well this is the same day but on a lower time frame. 10Day30min chart. This
looks a lot like it was a tame equilibrium day doesn't it? All that action only
to open and close at about the same price...ergo doji.
In many instances the price action to form the doji is much more flat than
this. It is a few sideways moving candles. The open/close of the doji is the
significant level that is being highlighted. Don't take my word for it, you
lazy lump, look it up. Do what I did. It isn't a brain surgery.
So wherever you see a doji, understand this. In a lower time frame, a bunch
of candles consolidated at the price level of the open/close. And this is
significant because, the areas of consolidation, are generally areas of
rounded tops or rounded bottoms, where momentum finally turned. These
spots are points of support or resistance, points of generally longer-term
significant levels.
Okay so now that we got the theoretical mental meanderings out of the way,
how do we apply it all in practice? Do 100 push-ups before the open. Drink a
keg of beer and then trade just by whatever you think might be a doji.
As you know, accumulation is the process of building up bullish momentum,
to push up the price. Its target will be the previous support lost. Well at each
of those support lost, one will always find a doji. Similarly, during a
distribution process, it will target the previous support that lead it to the
high, and again, you should find a doji.
Well Dawg!! Wait. Here I am looking at my charts and there are at times
many dojis to choose from. How do I choose the right one?
The shorter the time frame, especially in the tick charts, you will find a ton
of dojis. Yes I know, the plural of doji is doji. It just weird not to have the s.
Regardless!! You should also see tons of dojis when the entity you are
looking at is extremely low volume. The thing to do is to bump up a time
frame. Just like with trends, the rule of higher time frame trends apply to
dojis. The higher the time frame where the doji is seen, the more significant
it is. In the examples above, what did you notice the doji really did? It
removed the clutter of thought that progressed the entire day. It summarized
it and said, there is something here that was hard to pass with the current
momentum. Yes, if you get it, you will understand in the granular sense what
Nison was teaching about doji and reversal patterns. If you don't get it, guess
you need more studying.
So what do all of these things imply. I kind of want to be more explicit with
some of these things. On the way up from an accumulation set up, you will
hit many previous supports that you may have blown through on the way
down. When targeting as to how far the accumulation pop will go, here are a
few things to consider:
1. If there is a doji at a higher time frame but not in the low, from
which you are basing your entry on, you will experience significant
resistance at that price level.
2. If you only see it in the low time frame, and you have confirmation
of the momentum from your adjacent time frames, you will see a
pause there and then blow through it. The pause may cause you to
draw back down, but due to the momentum, it should take you up
to the next level.
A 2-stage accumulation play always has a mid point to where price action
pops up to and then draws back down to test the previous low. There is a doji
associated with the mid point and you know this pattern may be the start of a
significant reversal for the time frame. The question was always, how do you
know if the 2-stage accumulation will produce a new low before it pops?
If you figured it out, the process of accumulation and distribution, is drawn
out. Logically, this process is necessary. It is the applying of breaks to
provide the necessary momentum change to move the price action from one
cycle to the next. Go with that thought.
Applying the breaks.
That thought alone suggest, you are about to arrive at your destination. It
doesn't mean you arrived, you are about to arrive. This is important to
understand. People tell me, I saw the accumulation/distribution, but I got
stopped out only to see it do what I expected to do.
Just because you saw the accumulation doesn't mean the distribution that
preceded the accumulation got to its target. So you must understand what
higher time frame was truly responsible for the distribution to make the price
go down, and find the actual doji it wants to hit. Guess where you want to set
your stop? Not at the doji, but 1 tick past the bottom of the stem, for your
buy order, or 1 tick past the step for your sell order. That is stops!!! Not
exits. Exits. Whether you are long or short should be at the body of the doji.
The magic is always, that body exit will always get filled.
Where are the doji?
Look for the next immediate doji to your left.
Aside: I apologize for not having new content up, I've had quite a busy
family life with all kinds or events. I will add some before the fact charts by
Monday, some people have been hounding me for new content.
Issue 45/89 - ES Go!
Wider the base, the bigger the space. Was taught that once. As we see this
huge accumulation play continue to move up after passing the sideways
range at about 1130. The whole thing developed from May to September.
The July low was the final stage of the accumulation where bullish
momentum was set in.
The low volume has been doing their magic on the market continuing to
push the market using the monthly trend. The daily has become more bullish
in its underlying. However there is still more work ahead. The daily is a
smaller bucket than the weekly. Which means what?
It must overcome the negative divergence being enhanced by the daily's
move. The low volume pops essentially feeding the bearish wedge of the
weekly.
What does the sage know about the potential of double dip recession. Warren
Buffet was said to have said that there will be no double dip recession.
Should the daily sustain its bullish run, it may defer the possibility. The
technicals will be satisfied in some way. Maybe another fat finger day.
Computer glitch!! Like I've said before, it is in the market's best interest to
move sideways for some time and build bullish momentum. The daily
outlook has been changed but the weekly has not. What will be interesting is
how fast we can get to previous weekly high. If we do get there too fast too
soon, then a major correction will occur. Driving up the price and
establishing stronger support and resistance on the way, will help put
technical stops in place. For example 1103/1104 and 1120/26 area.
There was this dumbo in chat, the other day. He wanted to know what the
"news" was that caused gold to sell. I tried to explain to him that there was
distribution that set up the intraday sell. Then the dumbo says..."Gold has
been accumulating since April.” LOL dumbo. You can't ask about intra-day
fluctuation by using daily weekly view.
The point is to make proper decision about your trade or your analysis of
the market. Always understand how what is happening now relates to a
higher time frame out look. We were bullish and then it sold off. Why? It’s
the fed!! It’s the news!! Don't be a dumbo referencing the wrong time frame.
Oh by the way did you catch the Google pop the other day. Did you know it
popped because they announced their auto pilot car? I wish I knew about it
before.
Interesting similarities in the daily chart of Google and especially
accumulation targets what again?
Issue 46/89 - GOOG POP
How?
The progression shows accumulation. Enough said.
Issue 47/89 - The Responsibility For YOUR
Trade
There is this guy in chat today that kept on screaming at the locals. Because
he was short he blamed them for the market going up. The funny thing about
these people is that their failure in trade is never their own mistake. Their
failure in their trades is never their fault but someone else's. Arrogant? I
think that word is a little soft. What is interesting are the rationalizations
they come up with. Bottom line. News.
You know these people. It may even be you. They are the angry and bitter
people in chat. There is this other guy who calls the phenomena the
"invisible hand.” You know I've come across that term in economics class.
This mystical hand is responsible for stealing the monies of many traders.
This invisible hand is so powerful it will change the perceived trend in an
instant. Obviously I must have missed that part of the class because I thought
it did something else.
So I told the opinionated person, to read his charts. He told me the charts are
useless. The bearish trader told him to get a clue. And the invisible hand guy
starts talking and helping the other guy off load the blame to ... the
government of course. How do they know for sure? If they are so intelligent
to know all this stuff, why are they always caught in the wrong side of the
trade when the "invisible hand" comes to work. Their speculation is so
fantastic that many people think it is credible because they sound like
traders. If it sounds like a duck is it a duck?
Charts are useless? Have you ever taken a ride in the subway. Having the
charts and not reading them is like contesting whether or not you will stop at
the next subway station even though it is clearly showing in the lighted map
following the sequence.
How powerful is this invisible hand? If it is so powerful to steal your money
by making the market go the other way it ought to move...why did the
people who control the "invisible hand" not prevent the sell off of 20072009? The government is manipulating the market. Why didn't they
manipulate it so it won’t sell off? So they wont be so obvious? It seems
obvious already because every time you are caught on the wrong side of the
trade you know it is them. If that is not obvious, I don't know what is. If big
brother is so involved? Why didn't they shoot the CEO's before they could
inflict the damage that they did? If big brother is this intelligent, then are you
not negating all the negative comments about how they are screwing up the
economy?
Is there really news for every dip and pop of the market price? How many
stock entities are there? How many times does the market or stock fluctuate
during the day. Is Bernanke’s bodily functions news worthy enough to affect
all of those? Does Obama yawning also equivalent to him saying something
in public to cause the market to drop. Why would I say that? Because he
opened his mouth and air did move. Laughable? Insane? It takes a lot of
talent to spew a bunch of half-truths together and weave a compelling story
out of it. Perhaps a profession change is in order? Be a writer or a comedian?
Read your charts. Take ownership of your own action. It isn't the
government, the news, the MM's or the PPTs. It is simply YOU!
Issue 48/89 - Over Thinking It
Even after learning some techs it is difficult to not over think the whole
process. I have people that trade with me that still over think things. You get
rid of news. You equip them with all the foundation concepts and definitions
but come time to trade. "Be careful there is an earnings report today and
there is a gap up there."
The gap becomes a point of bias even though the gap is well above the price
action that has been distributing. Distribution alone says it will dump but the
fear of the report says it may pop.
People study technicals. Read everything they can about it, only to discard
its full use by mixing thought process that no longer lends to logic but
funnymentals. Some people pay $3k to go to a class that teaches them
technicals and leave again to blame the government announcements.
What is causing over thinking? Fear. Simple as that. And due to this fear.
Logic goes out the window. What is the cause of this fear? Conditioning.
From what? News and experts. News attribute market events to other events.
Experts and people whom you would pay to provide you a service perpetuate
the notion that trading is a nebulous undertaking. I know a former broker
with a Series 7 certification who never really understood how the markets
move the way we've explained it to him. How was he thinking before?
Same as everyone else. Fear the news. And then trade the news. Not very far
fetch if you think about it. How many people do you know have degrees to
do the work that they do but you know for a fact they have no clue. It is just
a piece of paper that says you are trainable. Why do you think doctors go
through the hands on training that they do before they can practice? Would
you like a plain old "degree holder" to operate on you?
How do you counter the fear. Well you need granular understanding on how
the market moves. So that there is no doubt that 1+1 = 2. The process of
accumulation and distribution is a description of momentum. The
understanding of levels and legs provides you the entries, exits, and stops.
All crucial to making a solid trading decision. Identifying the actual price
using the dojis further simplifies the thinking process. Accumulation and
distribution can be identified through visual queue. Such visual queues no
longer need further thinking on your part when you see them because you
understand by the definition provided what the granular meaning of each. Do
you need to think about it over and over again? If you do. Guess you need to
study more.
Cognitive Bias WikiPedia.Com Definition - A cognitive bias is the human
tendency to make systematic errors in certain circumstances based on
cognitive factors rather than evidence.
Understanding accumulation and distribution provides you the evidence you
need to make a decision. But people allow their fears to get the better of
them. Understanding the legs that due to the accumulation distribution
provides you the concrete evidence of the direction the price will go. What
more can you ask for? Logical and consistent. Just what you want to make a
non-bias, fact base trade. Is it really this simple? If you took the time to
know it know it, you tell me.
But fear is a tough foe. GI Joe always said. "Knowing is half the battle.”
People are equipped with the knowledge to understand the market but are
not necessarily adept to those knowledge. Do they know it know it? No. Can
they recognize it? No. But when it is pointed out to them. Oh yeah clear as
day. O now I see it. Ergo ...
After the fact. Everyone knows what an ascending wedge is but can't
recognize or even quantify the exact conditions that make is a reliable chart
pattern to use. Do you? What is the other half of the battle? Execution. Can't
execute if you are filled with doubt.
Why do you over think?
Because YOU don't really know it know it.
Issue 49/89 - ES Review
To the moon they say. To the moon!!
One trader thought that we should be at 1250 by this time. Can you say crack
head? Why do people who think of themselves are "pro" traders ignore the
very thing that they consider time in and time out? There are levels to be
respected up and down the charts but people love to be over zealous about
their expectations. I wonder if they traded it that way? I love this other dood
in chat the other day. Says daily charts are not necessary. They have no
influence on intraday. Okay...
Sure we are up here nearing the 1200 range. Sure I've been bearish about it.
And seriously folks how can you not be? Sure we made it up here but on low
volume. Am I disappointed that we are way up here? Hell no. People don't
seem to get that distribution in the daily takes time.
Enough of that hoopla. Lets talk about business.
The red lines show how much more bearish we were with yesterday's high
and so we had to sell from there. Some people wanted it to go higher maybe
up to 1223-27 and maybe up to 29. Um no. Not yet. Dotted yellow lines tell
you a different story. Showing you the distribution that has been in place for
a while.
The next areas of support will be at 66ish and then 63ish. Already the market
is setting up the response after reaching those levels. Lets see how it all
plays out shall we. As you may already know the right leg of the yellow
dotted line always does the same thing over and over again. The 30min
already wants to pop this thing up but we can expect 1 more draw.
Don't be bearish. Don't be bullish. Just follow the market.
Issue 50/89 - And It Goes Boom
Well finally the market retraces back up to the April highs. As discussed
before, the market produced a huge accumulation base starting from May to
Sept.
The funnymentalist were all so busy trying to short the market. Some had
really exuberant expectations. The crazies were all pointing at the PPTs and
the QE2. Give me a, ahem, a break.
The day was really was pretty uneventful. So uneventful in fact that I took a
long mid-afternoon nap. Just in time to see the 2pm EST pop. A lot of
people kept trying to short. There was no significant shorting opportunity.
The whole year has been moving that price up on low volume pops and noncommitting bears. And yet to them this is market manipulation. Blame
Obama. So much effort to cling to inconsistent reasoning by stitching
together news from different sources. Are they really that intelligent? Why
don't they just admit they don't know what they are talking about? The
market has retraced all the way up here. These funnymentalist still blame
Obama because the market popped and they were short. And claim the
economy is in ruin because of Obama. Why? Because they were long and
the market sold. Isn't it an inherent trait that intelligent people look for the
truth and are open minded?
This accumulation pop is textbook by definition. Sell off, market moves
sideways, build up bullish momentum. This is done in the basing process.
Then pop to reclaim the previous support lost and then reverse the trend by
closing above the previous high.
Some have said that the strategies I talk about here are not for intraday
scalping. Hello! I'm a scalper. Obviously these people invested a lot of time
to educate themselves. The accumulation and distribution I discuss is not a
strategy. It just describes how the market moves. It is technically consistent
across all time frames. It doesn't care if the market is bullish or bearish.
When market is bullish then we play accumulation. When market is bearish
then we play distribution? Is there something I am missing?
Where to next?
We gain a different and cleaner perspective from the weekly view. Here we
can clearly see how we have reached the April highs. And now for our next
target, where we must go to reverse the trend that causes the huge sells off of
2007-2008. Which takes us now to the previous support we lost back in Sept
2008.
The more immediate levels that we are coming to are at 1220.5, 1223-24.75,
1237.75. Just to name a few. And where are these levels coming from? Back
in 2004-2005 weekly perspective. A few weeks ago people were claiming
we would be at 1250 by last week. Some of these same people were the
one's trying to short today. Go figure.
Issue 51/89 - Distribution Constipation
A lot of people have been trying to short the market. Granted that there are
technical basis for their observation. Their problem isn't that their analysis
isn't good. It is just not supported by the proper time frames and by the
amount of volume. This situation makes it seem like the market is being
manipulated or is in major constipation. Lets talk about manipulation first. I
can't say if it is being done so or not. Bottom line for me is that whether or
not it is being manipulated, as long as they can't hide their transactions, I'm
good. The second thing that must be noted is that, since the low achieved in
2009, the market has done one thing really well. That is, pop up on low
volume. There are a few things that you can attribute to the low volume.
One, people were wiped out of the game. And secondly, many hedge
funders, and there were many back then, who would have taken every
opportunity to short, were wiped out also or consumed by larger institutions.
There are a lot of people who have said fundamentals are out the window
and technical are not working in this market. Fundamentally you shouldn't
be investing with fundamentals if you are short term. Technically everything
has been technically perfect.
What is driving the market higher is really longer-term trend. People don't
understand that, a huge accumulation process discussed in the last issue is
largely responsible for us regaining the April high and surpassing it. Even
the weekly closed above the April high. The other major component to the
drive up? Low volume.
The bears are not participating in the market. Take a look at the volume that
has been in play all year. Is this the volume you had in 2007 or 2008? No. Is
this the volume you had pre-2007? No. Not even hitting 2million by 10 am
EST. So what has been happening. Some people have wrongly identified
distribution in the 4hr time frames. Yes progressively there is distribution.
However, in the 4hr realm, it can take weeks for it to play out. And it if
happens, it will be short lived if the volume does not participate. And so
where does the trend go to follow. Longer term trend, back to the daily.
This 4hr shows distribution and trend and how momentum works.
How do you determine what volume is doing?
People understand some technicals. But when you are trading for the short
term, you really have to understand momentum. A lot of people don't know
how to see momentum. A lot of people can't use their oscillators or even
identify the patterns that turn momentum in their candlestick charts. It was
funny last Thursday and Friday, people were really adamant about their
shorts. Whenever I saw the momentum turn against them, I would ask if it
would be okay if I (moo'd) go long. O no you can't this will go down more.
No it isn't, momentum is turning. Not only did it turn on them after the open,
it also setup a turn by mid-afternoon in the intra-day intermediate time frame
of the 1600tk and 5min.
Trend
Some people don't understand what trend is. And why it is crucial that trend
is not deviated. If the basic principle of trend is loosey goosey, then trend is
not a technical consideration. There is no such thing as trend. But trend
happens. There was a generalization told in chat the other day, that when
volume is low, the market will pop up. Yes but only if the higher term trend
is up. One of the first things I learned with stochastics, when volume drops,
is that price will follow the higher time frames trend. Generally people
equate the fast line of the Stochastic to the price action. But it doesn't always
happen like that. Sometimes the price will not follow that line's direction,
but a higher time frame's direction. Volume dropped during those times.
Why will the dropping of volume follow the higher time frame trend?
Because it is the trend! The lower time frame is subject to that trend.
If you claim to be a technical trader, then uphold the principles that technical
trading requires you to understand. Some people claim to be technical
traders, but utilize funnymentals to explain why the market moved. You can't
be divided in your thinking process.
If your understanding of technicals isn't sufficient, that you change your
technical analysis for different situations, then you do not have a solid grasp
of technicals.
Issue 52/89 - S/R Revisited
I really want to revisit this topic because while it is the most simple and
basic concept in technical analysis, many traders have no clear idea what
they are and how to use them. There is this one trader I know that has them
backwards all together. He calls support resistance and resistance support.
While both lines or price levels do the same thing as you approach them.
They repel the price movement. Support is the price level from which the
price bounced from. It is the level that you approach when selling off.
Resistance is the line that stops the price from moving further up. It is only
natural, that once you have overcome resistance, it becomes support,
because now price action is above it. In the same vein, once support is lost,
on the way back up to it, it becomes resistance, because price action is below
it. Not rocket science.
Resistance
Back in April 2010, the ES tried to reclaim the support that we lost back in
Sept 29, 2008. At this point ES met some resistance. And the week of Nov 1,
2010, the ES closed above that candle and gained it as support. However the
following week, the ES closes below that price level, and once again that
price level becomes resistance again. Very simple concepts thus far.
Support
The week of Aug 3, 2009, the ES claimed support at 1005.75, which lead us
to the April 2010 highs. This support is tested in latter part of June, and first
week of July 2010 which lead us to the Nov 2010 highs.
Areas of Consolidation
As you can see in this image, areas of consolidation provide 2 very
important pieces of information. The range provides you level of support (at
the bottom) and level of resistance (at the top). It is a beautiful thing. As you
can see in this example, these levels that played significant roles in the past,
will continue to influence the future. In this 5day 15min chart, you can see
that 1192.75/1193.00 was a support that the ES tried to hold back in Nov 19
at 5:30 am EST, and again at 6:15am and we finally lost at 7:15am. And then
we reclaimed that support again by 11:00am to lead us to the 1206 high. You
can how influential this level of support became throughout last week. And
because of the North Koreans, we failed to reclaim it and caused the ES to
sell. You do know I'm being sarcastic about the North Koreans right?
Technically we were bound to fail. We will discuss this further in later on…
The top of this consolidation range is the resistance. Again, through out last
week this range played an important role of keeping the price contained.
Last Monday, we came up past this level, but could not close, and got here
on more bearish notes than when we arrived there the first time on the way
up back in Nov 18 10:30am est. And so it is natural that it would sell. We
again go above it after struggling to get over it all day Nov 24th, by end of
day 10:15am. But to hold this high was not possible, because again on even
more bearish momentum, so it sold once more.
The channel produced by areas of consolidation provides you a way to
identify levels of support and resistance. I could have identified more
consolidation areas at each peaks and bottoms, but I just wanted you to see
how powerful and useful areas of consolidation can be.
Let us discuss Friday's action, as an example of application of knowledge
gained. You see, some funnymental traders and the news blamed the
negative results of the market on the N. Koreans. I suppose that it could be
but really, I honestly don't care to know with regards to trading since
technically the sell was supported.
Since Wed 10:30 am, the market has lost a lot of momentum during the
consolidation. Even as the ES got to 1200.50 by end of trading day, the
distribution process is quite obvious. The distribution returns the price back
to where the left leg started. At that area of consolidation, at around 8:15am
on the Nov 24th. And because this was a level of significant support, the
price action bounces, with the support of the momentum by 7:30 am that
Friday morning. And the accumulation led it to return to where? Back to
where the leg down started and the consolidation point at about 2:30 am
Nov. 26.
By this time 1192.75 is not a support, it is resistance and after a sell, you will
not accelerate beyond it at the first try after you just sold. You will require
more momentum. It is just how the market moves. But really, we all know
technicals is humbug and there is no such thing as trend because this price
movement was in response to N. Korea.
As we continue to discuss S/R in later issues, we will discuss more about
what is now really clear and apparent, to you. If market consolidates on its
way up, it will respect those areas of consolidation on its way back down.
Simple rules of S/R. The higher time frame S/Rs have a lot of history and are
more significant.
Aside
I love it when people talk technicals but then start talking about
funnymentals. They say, follow the trend but beware of the news! If the
news can gum up the trend, was there really a trend to begin with? How can
you follow the trend but then it will be completely violated by the news.
Does the trend exist? You are caught in a contradictory position with such
logic. How can you be trusting a trend when the trend can be violated. Yes, I
see, it is covered under market manipulation, PPTs, QE2 and MMs and
Obama and Bernanke and the North Koreans. Did I leave anyone out? Jorge
tells me POMO. Yes! Nothing is my fault I am an exemplary trader ... It is
all these yahoos who are screwing with me personally!
If the trend did exist and the reaction to the news was within the confines of
such trend, then the only reason you did not see it coming is because you had
the wrong trend to begin with.
A question was posted by an "Expert" trader: "Why FMM would suggest to
have someone look at a large scope of time ," because he felt it unnecessary.
This is the same trader who suggested that you don't need to see the chart
past 1yr. Why look at 180day 1hr why not use a smaller scope.
And herein lies the issue why some people miss the trend all together. People
like to put themselves in a small box. Why would you limit your view? If all
you used was 1day15min, would you have seen this huge distribution
pattern? Unlikely! Progression is a very important thing to see. You must not
limit your view. If the market movements have you baffled, cycle through
other time frames. And don't just cycle, zoom in and zoom out! If you can't
see what is developing, you will be caught unaware.
This box that people self impose on themselves is the very reason why they
are caught going long just as the market decides to end its rally. It is also the
very reason why they are very wary of the "news" and "events.” It is also the
reason why they don't know how to identify and play significant levels. They
don't know the history. They don't know why there are pivots and mas.
Anything they can't explain technically, goes into the X-files, market
manipulation and conspiracy theory. Progression tells you how you got to
where you are, if progression or history or the price action to the left of your
chart is not important, then levels and support and resistance are not viable
technical consideration and neither will trend.
And one more laughable statement by another one of those "experts."I don't
trust the doji unless supported by volume."
It boggles the mind.
Enjoy this post gang! Sorry it took so long :).
Issue 53/89 - S/R Action
So now that we know how to find S/R's, lets discuss how they work. One of
the simplest concept to learn is the leg. Any chart pattern can be divided into
specific parts. The primary distinctions will be focused on the legs of the
chart pattern. A double top and a double bottom have 2 legs. An Head and
Shoulders or Inverse Head and Shoulders chart pattern has 2 legs as well.
Legs
Legs are a great guides for you to pattern the price action. If you can identify
the pattern, and the momentum to support it, you will be able to use the
originating left leg of the pattern.
THE DOUBLE TOP
Here is today's double top play in the early morning. The leg up is the
template of your leg down. The start of the leg up is the actual target of the
leg down.
As the double top's highs are hit, it will trace back down the mid-line. After
all, a double top is a distribution pattern. The mid-line is what distinguishes
the double top. This mid-line bottom is defined by the area highlighted as
significant level #1. This is the level that we by-passed on the way up,
because we have more momentum on this run up than when we hit the first
time.
So the mid-line will pop from here. Why will it pop from there? Because on
this first attempt to sell from previous high, we are still more bullish or just
as bullish when we arrived here on the leg up. The distribution continues to
progress. By the time we retest the previous high, we are more bearish. So
we sell and hit the start of the leg up. There is 1 wrinkle to this pattern
because on this drive down, in the lower time frame, the test back down to
the mid-line, we were still a little bullish, so it popped it up to exhaust the
bullishness and we sell toward the start of the leg down.
This is how momentum and levels interact to define the price action.
Useless funnymental quote:
08:32 dumdum: Jobless #s were exactly what bears needed
08:32 dumdum: To damper yest. rally
During this sell the people who don't know how to read charts wrongly
assumed that the rally was over. Because they don't understand the
accumulation that produced this pop, they conclude due to the news that the
move is over. If you have to subscribe to funnymentals to make sense of
every move with such wild justifications, then you have no grasp of
technicals at all. Go find a job and stop trading.
The Double Bottom
This is the 4hr view, you really have a giant double bottom formation here,
and it is an accumulation play. Where does the accumulation play want to
target? The previous support it lost and then the previous high. The useless
comment up there was so wrong, because the little bit of draw had not
enough strength to off set the huge accumulation momentum created by this
base. Very ill informed. Now people will claim pomo and what ever
funnymentals. In this example the leg down is the pattern for the leg down.
If you read the levels to momo as I did in the double top formation, you can
see why you will be repelled by each S/R.
Another silly gooroo, told me that I should learn how to read a chart. He was
calling to go to 1150. The last week or so. Due to this accumulation, there is
no way it would go to 1150. Then the silly gooroo tried to tell me Monday
and Tuesday that there is a EW 5 wave down. Based on his own lame charts,
there was no way according to any other SPX wave setup that there was
even a possibility for the 1150. So who needs to learn to read a chart? Can't
even read his own EW charts to know that to deviate to 1150 would break
his count and wave structure. Here is a great EW chart: ArealEWanalyst
Based on this gooroo's previous work, there is really no way he could have
produced his EW chart on his own. And for him to claim Wave5 draw at the
wave 4 and even wave 3, just shows how much he really knows.
A second look
If you consider this 15min chart, there is no real way for you to determine
that this huge pop would occur. The only way for you to determine the
momentum for this move is to really put it in reference to the higher time
frame move. That 4hr accumulation is the reason you are up at these prices,
and due to the consolidation that occurred on the leg down, from 11/9-11/11,
the support we tried to maintain before selling, the test of this level on first
attempt will sell and sell to the next strong support.
The draw down helped build more momentum to the up side while
respecting the level as it came up to it the first time. I can't but feel bad for
people who tried to short this all the way from yesterday. The 4hr was very
clear about this accumulation play.
Accumulation targets previous support lost. The start of the leg down. Can
you make it any simpler? Isn't it easier to think technically, rather than
making up rationalizations you gather from the news, pomo, and other silly
inconsistent imaginings?
Issue 54/89 - Raid Awareness
World of Warcraft came out with Cataclysm. It’s fun!! One of the skills you
need to play WoW is known as "Raid Awareness.” In a raid, a lot of things
happen as the fight progresses. You need to know when to move and
position your character, when to stop your attack, when to interrupt an attack
and other things that normal gamers don't get to do in many games. You will
also come prepared knowing what the fight mechanics requires. You will
also know how to react if certain role players fail, so you can step in and
take over. Many games really just have you stand in one spot and attack and
you can win. The latter is not too realistic. And that is how many people who
trade, trade.
Have you ever heard of that ex-cme floor trader who claims to not use
charts? He poopoos charts but the truth is he can't trade without them. He
uses PnF charts. It’s an old school charting but highly effective. You don't
have to wonder too long why he was fired from the floor. He goes out and
says things like “You just got to feel it in your gut.” Comments like that
really lessen your credibility. It shows how much market awareness you
have. The beauty about PnF is that is provides you the range and they will be
hit every time. So how can you say "Gut move” unless you are trying to
bolster your ego?
Market Awareness
Market awareness is being prepared. Market awareness suggests you
understand the longer-term trend, the intermediate trend and the current
small trend. Not only do you understand it, but you know how they will all
fit in together. Because all those trends can seemingly contradict each other.
"Seemingly"? The real trend is always the higher time frame trend. The
smaller time frames meander through the levels and sometimes will sell to
build up momentum to the upside and rally to build up momentum to the
down side and all that work to effect the rally of the longer term trend.
Really a lot of what you must know is to thoroughly understanding the S/R
that are relevant to the current move. Momentum will adjust accordingly to
respect those levels of S/R. You must match the current action to the
definitive time frame. The definitive time frame is the time frame that has
matured in its accu/dist process and is/will be affecting its pop/drop. It will
be at the significant S/R.
Lets consider BAC. A few people in my group played this out really well. In
the weekly, BAC has been selling but was about to arrive at a region of
support.
The daily and the 4hr and 2hr were very telling of the accumulation process.
It formed double bottom with supporting momentum. Kudos to the gang
who took the profits!
If you consider the 4hr, it dropped really low, before popping. The low was
achieved at 1pm 11/30 EST. Some people classify those moves as shake out
or false moves. Market awareness and because you now know about S/Rs
explains that it was necessary to hit that lower price. It was the level!! So
was it false? Was it a game being played? Were you being shaken out? Hell
no!! It was technical.
What is interesting to me about some traders who claim to trade the futures
is that they have no market awareness. They don't know what the higher
time frames are doing. They don't even know what their intermediate charts
are doing. They don't understand progression. They don't understand how
the market moves. You hear a lot of
POMO, market manipulation, PPTs
and crap like that. They are your number one resource for market events.
They are your number one resource for news. I really love it when they flood
the chat room with a novel for you to read. To them this is being market
aware. How many times have you seen these people frustrated and angry.
Dejected that things didn't work out how they figured. Market aware?
Hardly.
Trade well, read your charts!
Issue 55/89 - Just For Jorge
Jorge has been a TOS pal since I've been in TOS chat. So here is a lil’
analysis for the Jorge.
So this morning, 6e lost a little ground and lost also the support at 1.3130
area. Based on this 1600 chart the rest of the day after dropping to the low, it
was accumulating. Now the perceived support that was critical since 10:47
EST on 12/17 was at 1.3129/28. Where is this number coming from?
4hr chart, 12/1 17:00 EST.
Daily chart of support area.
Now after selling below this support in order to pop up, it must be tested at
least once and build up momentum to punch through it on 2nd turn. This is
how momentum is used to punch through significant levels.
So in the 1600tk time frame, at 11:23-27, this level of previous support is
now resistance and it fails to close above this resistance. Why? If you look at
the last time we bounced from this level, we were significantly more bullish.
Back on the 12/19 at 19:43 EST and 20:03 EST.
So accumulation continues to set up the move. Including in the 15min time
frame. So momentum is supporting this pop. Conservative target is 1.315765-68 where the leg down started from.
Hope this helps Jorge!!
Issue 56/89 - Questions On Risk
Management
Happy Holidays Everyone!!!
People love to talk about risk management. And one of the best things to
have are stops. The question I have is how do you prevent loss of capital
from all your stops? Stops aren't bad in and of themselves, but is it the only
recommendation for risk management?
I would have thought that in order to effectively avoid risks, one should
strive to have better entries. But how can you achieve that if you can't read
charts? A lot of people have no real clue what their charts are saying. They
focus a lot on current price and try to guess what will happen next. Even
though people read charts they wait on the news or fear what news is coming
up. How then can you minimize risk without having something solid to base
sound entries and or exits on?
Some people think they need to learn more about the industry or company.
They subscribe to many news feeds and try to find all kinds of information
that may affect their chosen stock. They think that this is what professional
traders do. They consider themselves as being Warren Buffett like, but
Warren Buffett is an investor, these traders are all swingers and scalpers. The
distinction is lost somewhere. What is even more distressing is that they
trade the futures and forex in the same manner. TOS had a day trader on in
one of their Wednesday chats a couple of years back. And this guy was
interesting because he basically blew away most of the listeners idea of what
a day trader is. He was asked what was it about the stock/company he
invested in that interested him. The gist of the question. So what does this
highly acclaimed day trader say? Did he say he had performed tons of
research? Did he say he knew the news about the industry? Did he say he
had a tip about an event? None at all!! He said he saw and liked the price
action. And he goes on to say..."I really don't care about what the company
does and I don't really know what many of them do." And then he went on to
ask Sos if he knew everything about whatever company he puts a stock play
in. Sorry I forgot this guy's name, but this was the important piece of
information that I took from the chat.
If the foundation of what you believe to be "risk management" consisting on
understanding the fundamentals, specifics about the company and news. If
this is your way of knowing what is going on in the market, you may have
some thinking to do. Your whole concept of what it takes to make a good
trade was just blown away by this guy.
What is risk management? Is it merely setting stops? Ever use a butterfly
option? In theory, you can make money if the action goes either way. It will
work provided that you set the range properly. How will you properly
determine the range? Well you have to read the charts! You also have to
understand what the potential move will be in either direction. Now there are
ways to hedge these things, but the point being is that you should have a
fairly accurate idea what the price action will take. Even a butterfly is
directional in that if it goes one way vs. another, you can make more money.
So is it possible for you to lose money even on a butterfly? Yes! And you
even have to pay for setting one up.
Do options then minimize your risks? Yes! But what skills do you still have
to have? You still need to learn how to read a chart!
Ever ask a trader how he can see momentum. Bet you not too many can. Bet
you not too many can tell you what the long-term trend is and what the
intermediate trend is and short-term trend and how they will work together.
Even fewer still can tell you what momentum is doing in any of those time
frames to assist the trend. Most will tell you, they expect a pop/drop because
of some event or news. And if it goes completely awry, POMO, PPT,
Bernanke, Obama.
Ever heard of these frivolous lawsuits against McDonalds? Parents are
blaming their family's obesity on McDonalds food and toys. Seriously if
those parents actually learned how to cook many of them wouldn't be in that
situation. If they weren't so lazy to cook, they would not have started their
kids to eat out at the golden arches. If they actually cared for their children
by being firm when they said no, instead of coddling them, then McDonalds
wouldn't be an issue. If they actually paid attention to their health class back
when they were kids at school, they would know that burgers and French
fries, which really filled the air waves in the 80s as being unhealthy, they
would know better. Who paid for the McDonalds? The kids? How did the
kids get there in the first place? The toys!! Wait no the commercials did it!
How can the parents compete with all the marketing? Is it really necessary
that parents must obtain a license to have kids?
What does this have to do with traders? Same kind of thinking. People want
to make money right away but wont put in the effort to learn what it really
takes to do it. Instead they rely on things that really do not empower them in
anyway. News and Funnymentals that have no consistency. Good News =
Stock Goes UP. Bad News = Stock Goes Up. Good News = Stock Goes
Down. Bad News = Stock Goes Down. If things don't go right... not their
fault. A lot of denial and ignoring the hard truth.
If people are not smart enough to know what is healthy for them and their
kids, are traders really that smart that they can process all these different
pieces of information all at once and come up with the right answer? Are all
traders qualified economist and political analyst? How many of these people
are really smarter than a 5th grader?
You know it is funny, the market keeps going up and a lot of traders are
upset. You would think that they would consider this as being good for the
economy. I heard on the radio today, that companies will be looking to spend
more money. Looking to hire more people. Existing home sales is up. If
these traders get their way and the market goes down, the government isn't
doing their job, they would say.
Issue 57/89 - New Year Weekly View
Happy New Year!!!
It was a great New Year and was even more hilarious seeing all the cars
pulling over on the side of the road to spew their festive drinking. 2010 was
great! It was all low volume pop. We had fun with the fat finger day which
helped the bullish run even more. And although that seemed like huge
volume, what people didn't understand about it was that it helped extend the
run to the upside by relieving some of the bearishness in the system.
The bearish notes have not gone away. Technically we are popping on low
volume. There are great things happening with this action. It delays the bears
and at the same time strengthening the levels of support that will act as a
buffer to slow down the bears. This low volume will continue. The sideways
movement will continue, and in longer-term perspective we are distributing
still. What? Really?
When we are talking about daily and weekly perspective, we are talking
about very long time maturity of setting up. This is something traders don't
seem to understand. They don't really put what they are seeing in proper
perspective. They see distribution but don't realize that distribution is
working to accumulate in the longer time frame. Then they have really large
unsupported expectations about the distribution. For the last few weeks there
are these poser EW people highly biased for the 1130 to hit, completely
ignoring the longer time frame trends to hit the previous support as shown
above.
As you can see, this weekly is targeting its previous support lost back in
July-Sept 2008. We are coming up on levels back in 2005 and 1990's. The
pop thus far has been on low volume. What exactly is going on with the
market?
Well, if we sustain low volume, we will continue to follow the monthly
momentum.
What does the monthly have to do with the low volume? Trend. Plain and
simple. If monthly was bearish, a low volume will follow that trend and sell.
Low volume does not mean pop. Low volume follows technical laws by
following trend. Generally will default to a longer time frame trend.
As you can see from this monthly, we are currently working on reclaiming
the support we lost back in Sept. The start of the leg down that brought us
down to the 665 lows. Coming up here will also approach a level that was
significant back in 06 that was overcame back in Sept 06. This level of
support was a battleground back in 2008, ultimately failing in Sept of that
year. So do we expect a battle here as we come up to it as resistance?
Anyways have fun this New Year.
Issue 58/89 - Levels And Momentum
Well, if you know what levels are, you know that this will be about S/R. The
misinformed have been calling moonshots all last week. What is so sad, is
that whenever they call for the moon, the market pulls back. Clearly
displaying lack of knowledge of S/R's and momentum. These poor blokes, I
hope they are still taking gains. If they actually knew what they were talking
about, they wouldn't have been making calls for 1320/30 back Monday and
Tuesday and then again Thursday, Friday. If they understood what we
discussed last week, that there will be some strong resistance in this area,
then they would be more credible. Another important component that they
forget is momentum. Momentum has been waning since 12/13 and before
that with strength back in 11/18. These outrageous projections came from
the same people projecting 1130 pull back 4 weeks ago. On Friday, they
projected 1400 for the top of their trend line. As FMM would say, "Oh my
lord!!"
As discussed in previous issue, we are still working on the weekly retrace
back to Sept/08 levels. We are still on par for that target but there are more
signs of weakness building up.
Hang out with reputable Elliot Wavers. Here is another no-nonsense EW
person with real projections. OneElliottWaver or DanEric'sElliottWaves.
Momentum and Levels work hand in hand. Momentum will change long
before it reaches the level of significance in order to support the reaction that
will occur prior to reaching that level. Meaning, if you are approaching
significant resistance, you will know what will happen because of the
weakening of momentum. If you are approaching an area of significant
support, you will see momentum building.
Issue 59/89 - Levels in Context Part 1
Determining the levels of interest seems to be a tough thing to do. Not so
tough when the action is moving as the result of the completion of the
accumulation or distribution setup, but tough on some during the start during
the sideways movement of the process of accumulation and distribution.
Many people consider these sideways movements as chop. It isn't that the
market action isn't trending. The market is always in a trend. It isn't trending
in that particular time frame. It is in these times that people are trying to play
a longer-term trend and get stopped out long or short. Really, if they examine
their losses during these periods, it doesn't really matter that the market was
longer term accumulating or distributing, they still repeat the same mistakes
over and over. And that is why we want to put levels into context.
The sideways action is always due to a significant level. Understanding the
move in context is critical for you to determine your probabilities. Sideways
movement can be the start of an accumulation or distribution, but also
happens en route to targets of accumulation/distribution. They usually
manifest themselves as the mid point of the double bottom, the mid point of
the double top and finally the top range of a head and shoulders or bottom of
the range of an inverse head and shoulders. What always seems to be lost in
each case is the reason you are at that price level. The reason that the
sideways movement is occurring. This problem is why people don't
understand why the accumulation process produced a new low. Why the
distribution process produced a new high. Why are you accumulating or
distributing in first place? The immediate response is because we are about
to pop up or drop the price respectively. But never, we are accumulating
because the target of the distribution that led to accumulation is coming to
completion. We are distributing because the target of the accumulation is
nearing and so the price action is setting up for the correction. They always
forget what the original process is that brought them there. And then finally
the other reason why they get lost, is they don't understand where they are in
the leg. The first 2 reasons relates also to the latter.
The other part of putting things into context relates to the price action. Some
people forget or don't even realize where they are in the chart pattern.
Primary Distribution Chart Patterns
1. Double Top
2. Head and Shoulders
Primary Accumulation Chart Patterns
3. Double Bottom, Head
4. Inverse Head and Shoulders
If you still have to ask me how to recognize accumulation or distribution, I'll
hit you with a bat. And if you start with, that chart pattern doesn't look like
whatever, again, I’ll come out with a bat. If up to now, you are still looking
at textbook perfect chart patterns, it is time for you to take up another trade.
Price action produces these chart patterns. It is the manifestation of how
volume is being offset. The representation of Accumulation and
Distribution. When you are on the final shoulder of a head and shoulders,
will you call out for the moon? You might think that is funny, but people do.
Why does this happen? They don't understand the price action. They don't
know how markets move. They have deer looking at headlights syndrome.
Bottom line, they just don't know. Armed with all the technicals, they still
have not put it all together but still brave enough to put in a trade. These are
the people who say they know technical analysis or grasps concepts of
technical analysis but when it comes to applied, their focus is too narrow and
have no clue about progression.
This is part one of this primer. I've struggled writing about this concept
because to me it is rather basic. It is the culmination of all the technicals
already discussed. But in order to effectively discuss this issue, it will seem
rather complex and drawn out because I am going to take painful steps to
explain each concepts. And I say painful, because I actually have to slow
down my own thinking to describe it. In practice, the visual cues are all I
need to process the price action to act on them. And that is where you want
to gravitate to. You look, you understand and you act. Sometimes in order to
move faster, you must slow down. Just like the market, in order to pop/sell
hard, you must sell/pop up first respectively. Take some time to think about
what was presented above and how it relates to your trading.
Perception
Here is a chart. This chart does not show the price or the time frame. Can
you tell me if this is an intraday chart? Or is it a longer-term chart like a
weekly.
In this chart, can you identify areas of support and resistance? Can you
identify levels of strength? Can you see the legs? If you have trained your
eye and mind to understand what support and resistance is and how you can
see levels, then what I'm asking you, is easy as pie. If not, then you need
more studying.
Can you form a bias as to what this chart is? Is it 5min chart? Is it a daily
chart? Bias is what screws up people and their technicals. They form so
many bias when it comes to time frames too. They think one is too fast or
too slow. No possible way to trade the ticks. Is this a tick chart of some sort?
Before I reveal what this chart really is, can you tell me if you understand
how price action produced the sell and pops in this chart? Can you identify
the legs and how they came to be? If you are truly sharp and honest about
your technical skills, you probably can. If you can't more studying is
required. The visual cues are what you need to develop to make intelligent
decisions about your trade. You will not make painful analysis. You will
make quick and smart trades. No matter what time frame you are looking at.
Would it surprise you to know that the chart you were looking at is a weekly
chart? Your perception of time frame determines your bias. But some people
add an extra level of complexity. They think that one time frame is more
difficult to trade than another. This chart could have easily been a 512tk
chart.
Issue 60/89 - Impaired Trading
Impaired traders are easily identified. They talk in technical terms but have
limited their capabilities significantly. They are always waiting on
“confirmation. Waiting for the "break out signal.” I know about those things
because I used to do it. Why are they "waiting on confirmation"? Generally,
these statements are from people who do candle to candle analysis. Almost
always, you can tell from their charts that they also limit their field of vision
to accommodate their trading style.
What can you really gain by limiting your field of vision? You will more
than likely end up to the same conclusion about this kind of thinking,
everything is lagging.
If you understand how the leg up is related to the leg down, would you be
able to gain more meaningful insight into what the market is doing? People
talk a lot about support and resistance but have no real clue how to use them.
People do understand that what was support becomes resistance, but because
they are stuck reading candle to candle or have limited their vision severely,
they can't think ahead to use what they know. Chart patterns are useless to
them also because they never know how it will form.
People who don't understand S/R rarely ever get where the market is going
to go. Near term or long term. They understand what is a projection. Much
like how they would concede that this AAPL should retrace back up to 360,
but may have gone long just before 356 and end up ruing the trade.
They would claim that the problem was contradicting time frames. It is so
bullish here but then the shorter time frames were contradicting but they
know it will go to their target. Again, ignoring the simple relationship of S/R
and not understanding how price must obey their simple rules.
But what of the contradicting time frame or indicators of the lower time
frame?
The only person thinking it was contradicting was really you. You see, the
lower time frame knew that there is a significant level coming up, so it must
prepare for the response as it approaches it. Technically, nothing can happen
unless it is set up to do so.
I love how the news blamed the continued unrest that developed last Friday
to cause the sell off. But if you read your technicals correctly, the sell off
was pre-determined. It was setting up for weeks.
Do you see how it has been distributing? And where will distribution take
you?
Where did the leg start from? Even in your higher time frames, it’s clear.
Progression is how things work out. Progression tells you how things set up.
But people don't care for progression. They think that anything on the left of
the screen is nothing because everything on the right is a product of global
events. Cause and effect. The funny thing is, they don't understand that cause
and effect is the true nature of progression. To help the visually impaired
people trade they plot MAs and fibs on their screen. But even then they
aren't really sure how or why it works.
Issue 61/89 - Going Down The Leg
When you're going down the leg there is nothing to look at but the leg that
took you up. The leg up has interesting levels in between. This 1600tk chart
describes the leg that took us to the previous high.
There has been distribution. We sell and bounce at 27.5, now in order to
change the momentum to the upside, the market pops up the price as
observed here. This is a common action. Then after the pop, it will attempt
to test the previous support, in this case, it will be 27.5. As you know, when
you test this level, if you fail to generate enough momentum on the up side,
this 2nd test of 27.5 will fail and go straight to the next level of support at
26.25. Why do we want to see the market go down to 26.5? Because it can
be considered as the start of the leg up. Very simple. OMG!! Am I predicting
the market? Or is this an "edge"?! Can't you just believe it is technical?!
As you can see in this 5min chart, at about, 18:00 hrs on the 28th, this was a
level of support that helped us get to the high at 36.5. Distribution leads to
where? Can it be any simpler? Now structurally, this huge distribution
should take you back to 19.75/50 then 17.75/50. At each of those targets,
you should pop up first try, then go down to the next.
Now what about the MACD on the 5min? That MACD suggested that we
popped up on bullish volume. Is it significant volume? Compared to higher
time frames, like 30min or hourly, not very significant, but a retest of 26.5
should produce a little pop because of the elevation gained just in this time
frame. If momentum will turn and change here, you don't want to see a retest
of previous support on lower MACD achieved on 1 am EST.
Voila! Now by this time, it appears that the 5min MACD is still in process of
cycling down, however, since this is the first test of this level, we will
experience a pop. Then when we come back down, we should break through
and continue the setup of the 5min MACD cycling down. Where is the
momentum helping this pop coming from then if 5min is more bearish?
Surely it didn't come from a higher time frame. It must come from the lower
time frame. And the response is purely technical on how the market will test
a level and break it. The market does not do things on a whim, it does them
technically. Your job is recognize them.
Issue 62/89 - Market Does What It Does
Earlier today a trader was commenting about the tragedy in Japan. While all
that unfolding over there is not something to joke about, it is also sad that
this trader was trying desperately to relate what is happening there to the
market. After the market hit 1251 early today, he remarked how can the
market go up with all the turmoil going on in Japan. Then there was another,
trying to talk about gold going down at the time like this. When the dollar is
fading and there is so much fear, gold should go up.
It just shows how much people really know about how the market moves. It
just shows how really consistent their understanding of news driven cause
and effect from which they thrive on.
The market popped by achieving a new low at 1251 on more bullish volume.
We call this accumulation.
And how does this relate to legs?
And why did we go down to this consolidation? Isn't it obvious, that from
this consolidation area that it can be considered the leg start?
But when did this distribution began? Was it just the recent events?
The market clearly does not do anything that it is not set up to do. To the
moon indeed.
Why did GC drop? Isn't it in times of fear and uncertainty that Gold should
pop? This is the known correlation is it not? And when there is fear and
hording...it is gold not green back or stocks that should pop. Isn't that what
cause and effect of bad news should bring?
Oh, but this is after the fact. Do you still not understand progression? The
setup was days prior or even weeks. Yes the news accelerates the move. But
the moves are still purely technical and set up technically to support the
outcome.
Isn't it interesting what the dollar is doing?
Issue 63/89 - Price Action And Legs
I've covered some basics in the last few blog entries. In this entry, I want to
highlight some key points before moving further. It is amazing however,
how people just want to make things more complex than what they really
are. Some people think they can learn more than one thing at once. It isn't
really a question of whether they can or cannot, but when you are being
taught something, learn that thing being taught. When I was learning new
concepts like trend lines, that is all I did, trend lines. When I learned,
wedges, all I did was wedges. Many of my trader buddies who went through
the learning with our old buddy Bucky, know how I worked on my charts. I
didn't just say I understood what I was being taught, I rigorously applied one
concept at a time. As soon as I got comfortable with the concept, then I tried
to apply all the other things I learned to see how they work together. That is
what I did with FMM's lessons on candlestick mechanics. I learned what he
said, then put it together with my buckets and voila accu/dist with legs. So,
when you are learning legs, just do legs. So lets review some basic concepts:
Concepts of Price Action and Legs
1. When Price is going down, look to the immediate left and use the
leg that brought the price up.
2. When Price is going up, look to the immediate left and use the leg
that brought the price down. Did I blow your mind yet?
3. Now the leg on the left, describes the levels that you will
encounter as you move up/down that leg. Some may say, I can't
get how I'm suppose to find the levels. "sighs deeply" ... I would
say, go back and review my old blog posts. There are a few that
covered support and resistance and doji magic. This is where the
issue of how to learn something comes into play.
The simple answer is, points of consolidation. If there is a pause in the
price action, then there has to be a level there. If you look to the left of
the of that left leg, and you see tops and bottoms of peaks and valleys
in the general area of the consolidation, it’s easy to say there is a level
there. There is a reason why we note levels as support and resistance.
It seems hard to understand why people use the terms but have no clue
how to find them and what they really are. If it seems I am venting a
bit, it is because I am. It is for your own good. Really.
The very important point that you must learn is that levels whether in
the function of support/resistance when approaching it, must be
respected whenever you pass through them. That is the whole idea
why we find certain prices to be support or resistance. It is a terribly
complex notion. You do need a degree in quantum physics to
understand that.
4. When you approach these levels on the 1st attempt, you will be
repelled.
I love how people love to point out the "fake" pops and drops. It
popped there because that was a level and it was repelled hard because
that was a significant level and it was your first attempt. This is a fact
of how the market moves. It isn't about the news. It is a core idea of
what support/resistance do.
When do you actually go through a level?
5. Generally, with momentum allowing, you will pierce through a
support/resistance on the 2nd try.
Note, I placed a qualifier there. Momentum allowing. I will not go through
this in detail here. I've covered them in previous posts. The whole idea is, if
the market has set up a longer-term distribution, don't be playing a hard pop
up to new highs when you are not even at a significant leg stop.
Points 4 & 5 are key to calling out those gooroo's who were calling for 1304
to happen early last week. These maroons, as Bugs Bunny would call them,
forget these 2 key concepts. And more than likely, they blame other things
like news, HFT, government, MM, QE2, POMO and whatever else they can
make up. And because they don't understand them, how well do they really
know how to trade? Blessings and guarantees indeed.
Point 4 & 5 are the why we form double bottoms. It is also how double tops
work and hns and inverse hns. It is how the market moves. If you get it, you
should be able to understand where to go long, short and where to exit with
much certainty.
I did not provide graphics in this entry. I saved them for you to find and
understand. Find them on your own. If you are too busy, you can find many
samples in this blog. Learn these concepts and understand them thoroughly.
You can't progress to other things till you do. Don't just say, "Oh I get it. It is
so clear now." Do some work and see how they do work when applied in
live price action. If you are too lazy, there is this guy who says he guarantees
you will make money if not he's fee for his service is free. You should go see
him.
Issue 64/89 - Consolidation
Areas of consolidation have so much information to provide. Not many
people understand how to use them. When people see areas of consolidation,
many people make comments like "the market is trying to make up its
mind.” Speculative analysis. It isn't even technical. What do most people do
with such speculative analysis, they generally say they are SOH. Sit on
hands. No real clue what to do. They think it is chop and have no idea how
to play these sideways movements. Another thing that people do when they
get into areas of consolidation is go long at peaks, and short at bottoms or
valleys.
Technically, areas of consolidation are spots where momentum builds up.
The more noticeable areas of consolidation people should note are peaks and
valleys.
Peaks and valley have 2 very distinct properties that you can immediately
discern:
1. Support - is the level below the price action. When lost becomes
resistance. Lost meaning price action goes below this level.
2. Resistance - is the level above the price action. When regained, as
in price action moves above it, the level will become support.
Aside: you won’t believe how many people still mix this basic fact up.
Top Range
Bottom Range
When you determine these 2 parts of these peaks and valleys, what you have
is a range. And within these ranges will often see a doji contained within.
Where the doji open/close will also determine your mid range. The top,
middle and bottom of the range are significant levels. If there isn't a doji
present, the next thing to do is utilize the opens and closes of the candles.
You should see a price that is consistently being used as an open or close. A
note about doji priority. People have these generalizations they like to make.
One such generalization they make is "it works till it fails" pertaining to
technicals. The failure is that they don't recognize their own lack of
understanding. Not so much that the techs failed. You get remarks like. "I
don't trust a doji unless supported by volume" or "Sometime dojis fail." The
less absurd is easier to answer than that completely brainless comment about
dojis being supported by volume. The doji may look like it failed but it is a
matter of understanding the level precedence.
If you suspect a level with a doji to be a strong support or resistance,
look for that level at a higher time frame.
People often limit their view. The question is always...why? The real
problem is that people really don't understand what it means to "PLAN"
their trades. And with their limited view, they often form an irreversible bias.
This bias then solidifies their generalization that “it works until it fails.”
How do you trade with that kind of "confidence” in what you read? I kind of
picture a person walking, completely focused on his feet but not the road
ahead. Then he declares after each step, it works till it fails. And ahead of
him, just a couple steps away is a cliff.
That is how most people trade. Most of their trading considerations happen
at the spur of the moment, never understanding that what happens is a result
of progression. The higher time frame will always have precedence over a
lower time frame. If a level is respected in a higher time frame it will
always be respected in the lower time frame. The doji that aligns with such
higher time frame level is the doji of precedence. This will be the way you
will prioritize levels that seem to have a clusters of doji within 2-3 ticks from
each other.
Channel Range
There is another area that you can gain insight into support and resistance.
Many people consider these consolidation areas as rectangles or channels.
The channels I am talking about are the horizontal channels. These are also
important and telling areas of consolidation and provide the same
information as peaks and valleys. And are used in the same way.
This demonstrates what true support and resistance really work. If it was
significant before, it will be significant again. And you can gain a lot of
information from areas of consolidation. No I do not draw these lines all
over my charts. I look for them as the price action brings these levels into
play. I also try to understand how these levels have been played within the
context of progression. Meaning, has it been tested once before in the
accumulation/distribution progression. If it has, then more than likely, price
action will go through that level on the second attempt.
Now if you are intelligent, you will figure out a way to utilize this bit of
information.
Additional Charts
I enjoyed the calls from the room about 36, and one guy said POMO had
$6.5-8 billon for today. He was long when it dropped.
How did momentum support this action?
What is the longer-term view of this action?
Weekly view shows how it works with levels. Any different from any
other time frame?
4hr shows how the intraday legs are being targeted.
And the 2 hr momo that helped the bullish progression.
Issue 65/89 - Compartmentalizing The
Price Action
Technical trading is a skill. It isn't an inherent talent. And like all skills, it
can be learned and mastered. One of the skills that you will need to gain is
the ability to compartmentalized the price action so that you understand how
the long time frames will relate to the short time frames. The other day I
heard a lot of static about CL, why it was selling. I heard people talk about
their fibs, talk about their ma's and divergences. But the simple explanation
was far from all their mental meanderings. And obviously, I wont mention
the news hounds imaginings. So many people make up all kinds of
justifications for the drop and some are valid and justified. But what was
really annoying was, they used all kinds of indicators but failed to
understand the simple.
Simply, we came up to resistance.
Wow really? It was the previous support that was lost back in 08/08. It was
also a significant support back in 04/08, and so why wouldn't it be
significant resistance when we come up to it? Support and Resistance? That
doesn't make my screen like a NASA mission control screen. Too vanilla.
But people don't understand how to tie in their time frames. They become so
focused in on 1 time frame and 1 bias. They also made their trading so
complex by relying on their indicators that they simply forget about simple
idea of support and resistance.
It is a good idea then to learn how to tie in the time frames. But one of the
main complaints about doing that is their charts become inundated with lines
galore. You know like the sethian fibos on your charts with psychedelic
pretty colors and once in a while, when you wake up from your trance, you
want to be able to move some of them so you can see the candles. That is not
how you want to work.
How To Start
Start from a high time frame. And identify the S/Rs within the current price
action context. On this chart I will start with the weekly.
What you will find is that when you change to a daily perspective, you will
see these weekly lines line up to significant chart patterns.
Now what you have to understand is that you went from low detail to high
detail. In a weekly to daily, you will see 1 candle to 7 candles. And you can
discern different legs that make up certain candles. But the transition from
daily to weekly, is not nearly as detailed when you transition into weekly to
4hr.
Now what you have to ask your-self by this time, is what is relevant to you
for the day's activities. I could have drawn a ton more lines but I didn't. The
reason is, I want to make a decision about what the possible action the
market will do over the next few hours or so. What lines that I have now will
be significant for the day. Mind you these are the weekly lines. As you can
already see from the daily and 4hr, I can see some more lines that I can draw
to make it more comprehensive.
I grayed out the weekly lines and added some 4hr lines. I could go crazy and
add more. At this time I have not made any decisions about what the market
is doing, just drew lines close to the current price action.
Even though I drew a ton of lines. More lines than I usually do, just trying to
make a point. And when you understand what is necessary for you, you can
do whatever you want. But in this 30min view, you can see that what you
drew works really well, see how the current candle is bouncing off the
support that you drew? Magic right? Uh huh.
Lets start thinking about what is going on. So we can get a good picture what
the market is trying to do.
We know that in the weekly, we drew down from a weekly resistance that
was support from 2008. So from the weekly perspective, we are currently
trying to retrace up the leg that brought us down to the lows of 2009. And
we found support that was also support back in 9/08 before we lost it
9/29/08. Does it mean we are done moving up? No. You are just respecting
technicals.
So what do you think is happening in a shorter time frame?
First thing you have to do is understand what has happened thus far. So in
this 4hr view you can see the leg up that took you to the highs. That is
significant because it tells you all the S/Rs it went through to get to where it
got. So if it was significant on the way up, it will be significant on the way
down.
The next thing to note, is that we sold from the highs. And this will give you
your current local leg of interest. Because it is the leg that is most immediate
to the left of current price action. If we break down and lose the support we
are currently on (the green line), then the primary leg that brought us up to
the high will be your leg of interest. This is how you can compartmentalize
the action in your mind.
So what has happened so far, is that we retraced up the big red candle on
4/12 9a m EST. As we tried to reclaim the support we lost from that candle,
on our first try up the leg that sold from the current high, we obviously will
fail. Basic technicals again. And then we drew down to 107.8, which is the
support we held from 4/1 - 4/6. Wow, support before is now support again?
Very hard concept. Need to be a rocket scientist to learn that. But if you are a
lowly brain surgeon, you may grasp this in a week or so.
Now until it breaks that support, your main focus will be the leg down. And
you will work on understanding how it is trying to go up. So on this support
we are on, 107.8, we will try to test the previous high at about 109.32. What
it has done so far is build up momentum, on the 30 you can see a little W. It
failed to gain the support is lost from that previous high on the first attempt
and will bust through on this second attempt.
Now the overall progression on this leg up, the retrace done to 109.32ish is
the first attempt and on this push up, it should go to the next level of
resistance and then fail again on the support that brought you to the high of
110.22 back on 4/12. So around 109.57ish.
These are the basics of trying to understand what the market will do. When
you prepare for the market by understanding what it is doing in this way, you
can save your-self some confusion and pain. (twiddling thumbs while
waiting for market to do what it says it will do) ho hum....blah blah blah.
Finally!
This is part one on how to think the market through by compartmentalizing
the price action.
The next steps will be to use your projections and help you define your time
frames that you will work on. Linking your time frames will help you
understand the price action in proper context.
Issue 66/89
Skipped by Kewltech
Issue 67/89 - How That Werk?
How come it popped?
Anyone? Anyone? The 1st issue on Issue 65/89 - Compartmentalizing The
Price Action, we saw the action down to the 30min chart. And for some of
our scalper friends and people trying to figure out the action, says: "Hey
Dawg? Why didn't you look at this in the lower time frames like ticks?"
What is Dawg's reply? Dawg says: “How much have you read this blog?”
The thick yellow line going up is your leg up.
1. Is your 1st low. And the start where momentum starts to change.
2. Is your 2nd low. And where you confirmed the accumulation.
3. Shows your momentum was shifted from sellers to buyers.
Is this not accumulation?
1. Also shows you how the levels were respected. The 1st low retraced to the
support shown by the leg up on 4/14/11 at 2:20pm EST and was resistance
back 10:00 am EST that same day. And since it was the 1st test of this part
of the leg, it popped at 5:20am on the 4/15. So far, very basic technicals.
After the pop, the price revisits 108.00 again. This level of support was hit a
second time in the bearish progression that started when? 4/14 at 10:05am
according to this 5min chart. Which eventually formed this Head n
Shoulders pattern. Due to this bearish progression, which has not confirmed
the bullish progression that is has started, at 4am on the 15th, it will break
through the 108 support on 2nd attempt and then take you to the next level
of support (#2). Do you see the doji at 4/14 at 1:40 pm EST? And because
this is the 1st attempt in the bearish progression, you will therefore pop!
3. Shows you how momentum was setup by the time we reach this second
level of support. It describes how momentum produced an accumulation.
This whole action progressed to produce a wide base. The base being the
1st and 2nd bottoms.
Dawg! Why does the 30min make it appear that the candles just burst
through all the levels in between and here in the 5min, it didn't seem that it
did the same thing?
Since the draw from 109.31ish, the pop produced here will be 1st attempts to
reclaim previous support. So all of those consolidations you see in the 5min
starting at 109.10ish and then around 109.22ish is the market obeying the
technicals.
Well how did this all look in the tick charts?
Huh? This doesn't look like any of the timed charts. Do you know why it
looks so ... different?
I circled where this action that we've been discussing but where is the double
bottom? Where is the Head n Shoulders? Did the Dawg switch screens on
you?
The reason it looks different is...VOLUME!!!
Well you see time charts are time base candles. The tick charts are specific
volume via tick base candles. So what can you deduce from the difference
between the 5min chart and this 1600tk chart? LOW VOLUME Sherlock!!
Now an astute chartist like AskBucky would call this pattern a cup. And
those who follow this blog will also know that this is a bullish progression
based on the momentum pattern.
Where is the accumulation responsible for the pop then?
Ye of little faith. Did the technicals behave the same manner in the lower
time frame as they do in the higher time frame? You betcha!
Issue 68/89 - Lesson on Distribution
I love the reaction this morning when the market just dropped before the
open. WTF happened they say. I love the remark afterwards. I predict a
lower open. I know the guy was saying the latter in jest. But what are the
technical reasons for the sell and why was it so aggressive?
The distribution started on the 3/27, long before we got the highs. If you
look at the hourly, distribution started on the 25th, but that shouldn't surprise
you, because momentum will change on the lower time frames first.
One of the key levels was tested first in are #1. The low of the 3/29th tested
a support. Afterwards we pop up to the highs of April 6. Now as you can
see, the leg up, (yellow line), your price action started to move sideways. A
clue that distribution may be setting in. Another clue, is that your price got
higher and higher on lower MACD. We know that is distribution.
By the time we get to the 4/14, we test the low of 3/29, we should surpass
that, because we are still in the distribution process. The progression we
noted from 3/27. We will test the 3/29 low and fail lower to the next level of
support. Thus we are in the #2 area. As we hit the #2 area, which is 1298.25,
it is our first test. Progressively, from the 3/27, and noting the leg up, we
never tested 1298.25 once. So on this test, you will pop! Basic technicals
again on how levels are gained or lost.
Now, this facilitated the draw that we experienced today. And where will
distributions take you? To the start of the leg up. Area #3. Do you see the
doji candles on the 3/23 5:00 pm EST?
For those who like perfect HNS, this is a really ugly HNS. I love ugly chart
patterns. What is the right leg of an HNS? It is a bull wedge. So when it hit
the level of support at 1290.25, for the first time. We will pop! And this is
how levels work in context and how you use the legs to your advantage.
Issue 69/89 - Leg Hopping
"Reference the immediate leg for your current price action and
reference that leg to the primary leg to see the bigger move.”
Imagine if you knew about legs. Would it have prevented you from shorting
43. So sad how people were trying to short earlier but didn't see that we are
working to retrace up the leg down from 1.586k.
Now as you know, how we gain levels or lose levels, you will always test
and be repelled on first try. Many people don't understand that. They don't
get how to reference the price action to the immediate leg and reference that
leg to the to a primary leg.
If you had done that you would know that reaching 43 again today would be
your 2nd touch.
Now the first touch was done 2/18. We then sold and until today, we retraced
back up. Upon reaching this level of resistance, it would be 2nd touch in the
progression for the bounce from 03/10 lows. Now where do we get the levels
from? The primary leg down of course. You will utilize all the levels relative
to this price range. If you go to the weekly, you are currently retracing up the
6/16/08 candle. You will use that bar and grab all the levels going back to
2006 that will be significant as we retrace up that candle.
The leg hopping came from retracing back up that 43 Feb high then hop to
the main leg that will tell you how we are retracing off a larger leg. This is
no different with what you would do on the intraday. This also
compartmentalize the action to help you see the range the trend is working
on.
Now what will happen as you reach significant levels off this main leg?
Same thing you did when you hit 43. Same thing you did when you hit 46.25
on the first try.
Implementation of this kind of strategy will help you increase your
probability of a good trade and minimize your risk. By understanding what
the market is doing. Not only in the short-term but also the longer time
frame. If you can't understand what the market is going to do, that should be
a red flag for you to know that you don't know enough and should probably
sit on your hands. A good trader follows the will of the market and does not
think his mental meanderings will move it. It doesn't matter if it is a pomo
day or fed day or what have you. The charts will lead the way. Your job is to
follow. This kind of thinking elevates you from a junior trader status. You
wont care to note any of those funnymentals that others use as an excuse as
to why the market did what it did especially when it does not do what they
expected. You read the charts and follow the basic tenets of technical
analysis.
Issue 70/89 - Traders Should Be Vulcan
So I'm a Trektard. I like trade with all sorts of traders all day. It can't be
helped that I would say that traders should be Vulcan. Much like the famous
Mr. Spock. Not to be confused with Dr. Spock, the author who wrote about
childcare. Although, for many traders, it would resolve some issues.
Emotionless Vulcans would help many traders to trade better. They will
trade with logical and almost mechanical analysis of the market. No more
constipating about what the government policies will or will not do. No
more being shaken because a falling market is sad. Or endlessly agonizing
about how the good/bad news failed to yield the proper market response.
And when they err, there will be no agonizing over the failed trade or
agonizing over lost profits because of an early or conservative exit.
If traders were Vulcanized, Cramer would be poor. CNBC America would
actually talk about something substantial. And I may actually watch it.
Imagine a world without fear mongering groups like the Tea Party or Lou
Dobbs. Ooops that one slipped. But you know those news hounds in the chat
rooms that have a conspiracy theory about everything. But I digress. Did I?
Traders would analyze their charts accordingly without weird unfounded
emotionally charge speculations. They would completely understand that
momentum supports the move up or down. They would not blame HFTS,
pomo, qe2/3, ppt or Ben Bernanke talking or the president talking or the
Pope breaking wind. You know there was this trader that actually kept track
of news and how soon they affect the market in a spreadsheet?
Traders would actually make intelligent comments about how the market
moved. Instead of whacked out comments that don't make sense like: "...the
bull and bear trap and places that are targeted due to the bulk of stops
typically located in that area, and big money builds inventory and dumps it
into that stop liquidation "strength", ringing the register."
Can someone actually tell me what the hell this means without giving me a
nosebleed? What is very interesting to note about some of these highly
opinionated people is what are their qualifications to make such "informed"
comments? This is where the Vulcan logic can help.
Do you know what other Star Trek race that would be equally as perfect as
Vulcans? That would be The Borg. I miss 7 of 9 now that would have been a
Borg that I wouldn't mind assimilating with, but alas, I am a forever-alone
autist virgin.
Kev, thanks for the great idea.
Issue 71/89 - Supply And Demand
Thanks to my friend NPR, I got suckered to watch Ben L. in the CrackNBC
channel. Not that there is anything wrong with Ben. I just can't stand CNBC.
I prefer the soft porn at FoxBiz and the brainy chicks at Bloomberg. Like
GREEK2ME THE GREAT person I know... oh and THE BEST LIVE
GREAT AWESOME MONSTER FLIPPIN NOYPI. (hmm..a cat
"scanning" flipping noypi a bit redundant?) Becky had this bloke talking
about Supply And Demand. Mat something or other. Ben actually provided
more credible insight than this analyst. The move while looking drastic has
been distributing since 3/9/11. And in the hourly charts, Since Feb 22. Why
so much difference between the daily and hourly charts? Because change
happens in the lower time frames first.
Some may attribute these to latest development in the news but in the chart
world, it is baked in. Now lets look at this in a hourly. Yes this is omg after
the fact analysis. But if you aren't a maroon, you would understand that there
was a progression that the technicals adhered to in order to facilitate the
move. How you would play it has been discussed in this blog in many ways
already. So for some of you skeptics, try to use those spongy material
between your ears not your rears.
Now what about silver, that thing just dove off the cliff!
Judging from this chart, there was no distribution that justifies the huge drop.
Where did we say change happens first? Right! In the lower time frames.
Terrifying isn't it?!? If you can actually see the action in this way, you would
actually be scared to try to go long hoping for a new high ‘cuz this thing was
screaming. There was this tart the other day in chat claiming that silver was
going to the moon and this same tart wanted 57 on the ES and the very next
day was really bearish. Guess if people followed him, they would require a
lot of preparationH.
So what of supply and demand? Seriously there’s no real way to gauge
supply and demand in the charts. I mean sure you can correlate data that
shows how it does it. Who really cares! Why add the complexity? Perhaps
the only reason why you would do it is to sound like a TV speculator. Who
would want to sound like that? It just moves from level to level. Areas of
support and resistance. And when the momentum starts to fade, down/up,
you will see it before it makes the big move. What is really happening when
you see those divergences? Go see definition of Accumulation and
Distribution. Spend a little brainpower. I mean some of you freely burn so
many getting properly smashed. So supply and demand? PFFT!!!
Issue 72/89 - Making Sensible Trades
You have to wonder about what people say and do with their "scalp" trades.
It is as if people don't understand the difference between a swing and a scalp.
There are differences, but truthfully it can be a fine line. The problem comes
when people see and understand a move in the short time frames and then
make their decision to act or not because they are looking at the 4hr chart for
confirmation. Really?!
You've seen me mention this 4hr chart scalpers on this blog before. Those
are the extreme versions of people not making sensible trades. Because of
this huge error of perception. People either get stopped out hard or take in
huge draws before they see their profit. It also happens in the shorter time
frames. Some people see the action but don't understand the mechanics or
execution properly enough that they might as well be trading off the 4hr just
like those whacked out people. There is a proper way to trade off the 4hr and
an improper way to do it. But these people will suffer a lot of pain and losses
because of perception issues and time to profit.
What does time to profit mean? Basically, if you are trading off of the 4hr,
you should understand that your trade will be on for a long time. Because it
is a 4 hr chart. This is more of a swing. The time it takes for the 4hr to go
through its course takes time. Well Dawg, that is what I know and
understand. What is really happening is these people are looking at the 4hr
for confirmation for a trade that is around 2pt or less, that will complete long
long before the 4hr candle actually finishes. Well doh that is common sense.
There was this guy in chat early this morning talking about a short at 1.461
on eur/usd or 6e, and he didn't want to short it because the 4hr was not
saying it was a short. I was twitching when I saw that. One thing for sure,
that guy has no clue.
Yes I know this is the one-hour chart. The point is, how can you make such a
call if you know how to read charts? Do you see how .461 has already been
tested? The basic fact is this, change happens in the lower time frames
before the higher. This is the kind of details that people don't see when
utilizing higher time frame charts. This is the kind of detail that can cause
these higher time frame scalpers eat or endure a lot of pain for their short
term trades.
Well what is the proper way of scalping and utilizing the higher time frames?
This problem is not uncommon. Part of the problem is that people are into
candle-to-candle analysis. Meaning they are waiting for confirmation of their
Japanese candlestick analysis. You don't use a ratchet for a hammer do you?
Even more critical, they don't know how to stitch their time frames together
to make sensible trades. Can they get lucky? Yes. But more than likely they
will blow out if they weren't born under a lucky star.
When you use the higher time frames to help you with your scalp or swing,
understand that you are only interested in 2 things.
1. If the higher time frame has been setting up for a large move, (it has
been accu'ing or dist'ing), then you want to be in the position to ride
that large move.
2. If you are scalping for a point or a few, and the move is within 1 or
those high time frame candles, you will look for the level of
significance that you are coming up on or coming down to. This is
for 2 reasons again.
i. If you are coming up to a level, then you may look at that as a
point of exit for a long and or a point of entry for a short.
ii. If you are coming down to a level, then you may look at that
as a point of exit for your short and or a point of entry for your
long.
Common sense? Yes. But you wont believe how many people don't do it that
way. It is so annoying to see these people with their pretentious calls.
Epilogue:
LOL Epilogue. But a mental midget asked why the hell would you choose to
short at .461 anyways? I'd like to know that too. Long at Resistance and
Short at Support. It worked out but...seriously sensible? The guy who made
the 4hr statement would not know what to do anyways.
Issue 73/89 - Training Wheels
When I learned to ride a bike, like many people, I used training wheels.
Training wheels are great for simulating a real ride without letting you fall.
Some indicators are like training wheels. For me, they were the linear
regression channel, Fibonacci and EMAs. I used EMAs because I found
them more relevant to intraday trading. The point is to help you understand
how to evaluate indicators and then use them till you find something better
or you gain a stronger understanding so you can shed some of your clutter in
your trading desktop. Some people though, really like looking at all kinds of
indicators.
Some trading systems rely completely on indicators. They have a system that
they adhere to. If you take away those indicators, these people are less likely
to know what to do. Some of these groups are cult like. A lot of these people
are holy grailers. But it is a system that works if you follow it specifically.
The problem with some of these indicators base systems is that they will
have weaknesses and they are taught that there are some things the feds or
whatever is the cause of the failure. There are pros and cons to systems like
these. And if and when they come about, to teach these people the real
reason why things work the way they do, is to admit a weakness in the
system it self, or they will have to actually teach people how to read charts
properly, potentially negating the need to use their indicators. Part of the
problem is, most people are too thick and impatient to teach. Being thick
isn't too bad if you have great work ethic and persistence. But being thick
and impatient and only want shortcuts, easier to thread a camel through the
eye of a needle. So best thing...get them on the indicators.
I'm not gonna knock the value and effectiveness of indicators. All indicators
are a work of art in their own right. I always saw indicators as a way to
enhance my ability to see how the market moves. If you are anything like
me, you would like to know what actually makes the indicators work. So I
know what it really means when they do things. For those indicator systems,
that is not necessary. They talk about certain "shortcuts" that will help them
know what to do. Those shortcuts are generally some pattern. I know,
because I traded primarily as a momentum trader, and I developed a series of
visual cues that helped me and I still use to this very day.
There are generally 2 types of indicators. One is called upper studies and the
other lower studies. Many lower studies are really used for momentum
readers. Generally, most of these lower studies are a variant of MACD and
stochastic lines. What they do is combine them and specify different settings
to mimic reads that can provide the view of lines produced in adjacent lower
time frames and adjacent higher time frames. If you have multiple
complimentary time frames open to you during the trading session, you
could probably un-clutter your mind as well as your view by going to the
root study itself. But only if you understand how to stitch your time frames
together through the use of indicators. If you look at some of these
indicators, you will see how they take 1 or both the lines of the MACD and
combine it with another line like a stochastic line.
Some like the MACD can also be classified as upper studies. The MACD
becomes, simple moving average or exponential moving average. In this
form they become support/resistance lines. Many upper studies are used for
these specifically. POC, Pivots, fibs regression channels. All are used as s/r
points. The only one in that list that doesn't really fit because of how it is
calculated, are fibs. Fibs are a product of math magic. Some upper studies
like Bollinger lines are a combination of S/R and momentum indicators.
They contract and expand and clue you in on what is developing. You see
these are predictive nature of momentum indicators. The totally uneducated
don't really believe in predictive nature of the market and yet they like to use
lagging and leading indicators. How do those indicators work as predictive?
Through progression. You can't trade technically if you are still thinking of
funnymentals. Tonight many people are waiting on China report.
Upper studies are studies that can float along with the candles. What do they
really do? What do you want to know most from your upper studies? You
want them to tell you where support and resistance lines are. These studies
are definitely “training wheels.” Why? If you progress as a trader, you
should be able to understand how to get these levels of support and
resistance on your own. Many people don't even take the time to understand
how these indicators produce these numbers. The only upper studies that I
would not expect a trader to explain to me how these lines are produced are
regression channels, (but you can surmise how), Bollinger, and definitely not
fibs, unless you are a math nut.
What I've noticed about using these training wheels, not many know how to
interpret them in relation to a longer progression. I've read an awesome book
on fibs, produced by Bloomberg, and these guys know how to do it right.
But the book is heavy into the math and may lose some people. I have never
seen many people use them properly. What happens really is that you are too
focused in on that one area that they will become baffled why it broke
through some of their lines. With fibs, it’s hard to screw it up. But I've seen
people talk about pomo's and feds screwing with the market as the reason
why their fibs failed. If you are one of those people, you still need to learn
more. Is this the state you really want to stay in, dependent on indicator and
still under the mercy of funnymentals? This is where many people who are
dependent on indicators for their analysis fail. Many when faced with bad
reads, blame things external to the techs. Why? Because they really don't
know how to read charts.
If you are one of the few who can do with or without, then it becomes a
question of preference. But for me, less is more. Do I still use regression
channels, fibs and EMAs? No. I know how to find levels of support and
resistance. I know legs, how price action moves up and down levels and how
they relate to a larger progression. And finally I can read momentum. It took
time to get there, but when you get to that point, you will see with much
more clarity than before.
Get rid of some of your training wheels. By gaining better understanding of
your techs.
Issue 74/89 - Parabolic Moves
Accumulation and Distribution view of market has made trend lines obsolete
in my trading strategy. The reason is simply because I view all moves as
parabolic. If you get a sense of legs also, you understand what I mean. I
don't care to really see trend lines any more because I know the levels that
are significant to the retracements. So why should I clutter my space? On
accu, price drops, goes sideways, follows leg down for the pop. On dist,
price pops, goes sideways, follows leg up for the drop. While you can
imagine that the action took place as a "U" or an inverse "U", you actually
get Ws, HNS or their inverse counterparts. Regardless, the action is
parabolic in nature.
What is the advantage of seeing the market as parabolic instead of trend
lines base only?
There was this guy in chat that said you didn't need charts past 1yr. Knowing
what you know now about legs, wouldn't that blind you? While sure you still
have fibs and fib extensions for uncharted waters, but why when you have
something to reference.
Yes this is a top and bottom trend lines for the downward movement of the
PCLN. Now, the generalization on how to play this descending wedge, is
that, before the apex, or tip of the triangle, you should pop. There are some
that says after traveling 3/4 of the triangle it should pop. Generally, the way
many people have shown me and how many people do so in practice, is that
they don't even have an exact price to settle on for the pop. Just a visual cue.
Now with legs, all I have to do is look for the consolidation areas in the left
leg and determine the leg start from those consolidation. And I also know
that it may be a little lower before we get a good pop. Can I still use the
trend lines? Sure I can! But why clutter the space? When I draw those trend
lines, not the horizontals, my focus can sometimes just keep me in that
boxed in area and forget the levels. Now if you can keep track of both great!
If not, then you would lose relationships like I would. Many people I know
who draw these trend lines, never reference the previous actions as we
would call the left leg. The ideal way is for people to understand the levels to
the left and relate them to the wedge.
Yes I don't draw the horizontal lines. I keep a mental note of the price where
the line would sit, and if I have to, I'll use the cross hairs of the mouse
pointer. Why clutter the screen? I'm always evaluating where I am with
regards to the price action relative to the current leg I'm retracing up on.
Then how that leg relates to the larger move or primary leg. So I'll always
know where these lines ought to be once it becomes clear we are going
there.
Am I saying trend lines are useless? Hell no! I just like to understand the
moves as parabolic. Accumulation will go to the start of the leg where it lost
support. And distribution goes to the support that allowed it to pop to the
high. The whole process is parabolic.
You can still draw trend lines if that is what you are comfortable with. Don't
draw trend lines if you are not using a consistent correlation. Meaning the
price action of the left leg will template the price action of the right leg.
Keep it simple!!!
Issue 75/89 - A Lesson In Accumulation
Early this morning a lot of funny people were short to China. One maroon
attributed the pop to some news about Greece. Another maroon talked about
POMO. We all know news is late. And if POMO is going to "manipulate" as
those who were expecting a drop declared, those of us who are technical,
understand that if POMO is working on the market, we really don't care. The
reason is, if they buy or sell, it will propagate in our charts. There was this
one guy who wished that someone would erect a large sign to tell people that
today we will be manipulating the market, to let the tax payers know how
their hard earned taxes they paid to the government is being wisely used.
That last guy was being funny.
The problem with many traders is that they are trying to "predict" the
market. What they fail to do, is follow the market. They will vigorously
defend that they are not trying to predict the market. But in the end, because
they did not follow the market, they often blame external sources. It couldn't
possibly be that they actually have no clue what technical trading is. But for
the technical trader, the market does not do anything that it did not
technically support to do. You don't even care what is in the news and don't
care about economic events calendars. You just read the charts. So if you
were wrong, then you didn't really follow the market but used your bias help
form your prediction.
How do you follow the market? It isn't merely knowing what levels are. Not
just knowing what support and resistance are. Not only being able to draw
trend lines. It is understanding in context what the price action is doing
based on larger and longer-term progression. In many cases, once people
draw their trend lines and wedges and patterns they no longer understand the
whole move, just see what is compartmentalized by their drawing. So in this
issue, we will discuss today's pop.
First lets discuss that reaction to the news first thing this morning. Don't ask
me what it was. I have no clue because I don't care to keep track of
economic calendars. Just read the charts.
Some people think that that play was not possible to play. But as we know,
in order for the market to sell, it must distribute. And when it distributes, it
will go to the support that allowed it to pop. Or in “legs” terms, the leg start.
By the time it went back there, guess what, it must pop at 7.5 because? First
touch. Can it be more difficult than that?
So what was the pop today all about? Was it really pomo? Sure, if pomo help
set this up over the last few days they deserve the credit. All I know is that it
takes a lot of resources to be able to set things up. Market Makers and
POMO sound credible enough.
Suggestion: right click on the image above and open in a new browser or tab
so you can reference the image while reading the description
As you can see, the accumulation has started 7:20 PM EST, back in 5/22/11.
And then we progressed to a new low at 1302.25. From there, it worked to
regain the last support it lost at about 12.25. The first thing on the agenda
just before the open, was to reclaim the support at C. When it did that drop at
the announcement of the news this morning, you set up a 1st and 2nd touch
situation. By the time it made it back to C, it had to go straight to D. D is the
support lost that led to the selling to 11.25. The big red candle 5/24/11 at
4:00 PM EST. D at this point becomes a 1st touch situation and so must fail.
The Legs
The leg that we are working on is the off the primary leg that starts off at G.
Now G, can be broken down to parts, consisting of F, A, B. From the 1302
lows, before you can get to A, you must reclaim B. The support at B is about
17.25-5. Now, reclaiming B high, will be 2nd touch. Why second touch,
because, during the accumulation progression back to 5/22, we've already
tested that level of resistance even though we were still progressing
downward. Because we tested that, it cleared the way for us to reclaim the
previous support we lost at A. After you reclaim A, you go to F then G.
What you must understand is this 1st test 2nd test relationship. On first test,
you should notice in the ticks especially that on 1st test situations, the
momentum is changing long before it gets there. The draw down is to help
build up momentum to the up side. Which many people don't understand.
Consider the news release this morning. People qualify that drop as negative
reaction to the news. But how short lived was that bad news that was
received? Over all at the end of the day, we rallied. This is where people's
understanding of news fails them. Their bias wants lower but the market's
progression goes against them. Because their chart reading is lacking, they
can't see, how momentum was set up against them.
Now, back to the action. After failing at D, when we go back up to D, we
will continue higher on 2nd touch. And progress to the support at B. As soon
as we get to that support, we should fail at 1st attempt. Shown in the
10:30/40 candles. Then we bounced back and cleared B. Taking us to the
support of A producing E. Why? Because we've already tested B due to the
progression based on when accumulation started. So any failure at previous
support from when accumulation starts (5/22), becomes a failed test 1.
Now why did we fail at E? Because it is the first time we tested A based on
when that leg formed. We never revisited this previous support, when we
lost it at A till now. Eventually we pass A and get to 24.5. Why did we fail
there? Same reason as we failed at A, B, D etc. This time, our leg of
reference is at F. Why? Because we passed A. Until you close above A,
much like you did with B and C, you cannot pass to the next level leg part.
But by the time we got up to 24.5, the selling has been setup with the
negative divergence seen in the MACD's shows we have exhausted the
buyers. So the failure at 24.5, produced a new leg down. Reclaiming 24.5
will take us up to F provided we have enough momentum.
This action is similar to why we failed at 1373.5. The market does the same
thing over and over in the same manner. It doesn't matter what time frame
you are looking at. The best way I've figured how to read the action is to
understand what the price action is doing based on the immediate left leg,
and then relate that leg to the progression it represents to the primary leg to
its left. This will help me understand if I am over all progressing upward or
downward. And what my significant support and resistance is. This will give
me an understanding where I will go if I break the limits of the leg..
I would like to add this chart. Because when I say accumulation, people
always relate it to double bottom type play, which I highlight as 2-stage
accumulation.
The 4hr Chart
Does this look more familiar to you? You see the accumulation being in
described in the 10min seems extended and not the normal accumulation.
The extended view of what you see in this 10min chart is the progression
that takes place to form this double bottom like formation in the 4hr.
The 10min Chart
The 10min is the description of how it got there. How the 4hr chart got there.
This is why if you understand this, the charts provided could be tick charts
or whatever time frame, you could easily extrapolate, why it is also the
reason, if you understand these concepts that makes scalping a lucrative
venture. I love run-on sentences. Yes I failed grammar every year. It is how
the market moves, and we just follow.
This is distribution but I just had to weeeeeeeeeeeeeeeee about it. :)
LOL some maroon just asked if this is a flash crash. Obviously doesn't
understand how to read charts and recognized progression. In this
progression, the distribution started 12:45 pm EST, 5/25/11. After you
confirm the distribution on the new high on lower MACD, each valley on
the way up becomes, 1st test. So as we tanked today, and we revisit them,
whoosh!! Flash crash setup would be the same. But no, this is not a flash
crash. It is sad that people think that way.
And the Weiner is!? OWUDSHED!! It was a blessing indeed. Hmm...Are
Cramer and OWUDSHED, related? "A worldwide four-way rally is a
difficult move to stop as you can see from the market's inability to be rocked
too much by what now amounts to nothing more than local data.” Ouch! I
hope he has a lot of preparationH.
Issue 76/89 - Sweet Oily Legs
Just want to walk through some things about legs. It seems that a lot of what
I consider obvious, isn't so obvious to many people. Must be my ADD. But
hopefully this will help clarify some things. Really there is a lot to be known
about technical analysis. But the more you know, the more elementary the
whole thing is. And I know a lot of you hate me for saying that. Your
alternative is to learn a more complex technical analysis system, which will
introduce you to a whole set of vocabulary. Or you go back to being a
maroon who would say that the sell off the other day was "unusual,” and
would like to know what the news was that caused it.
Now, it would suck to do a re-run of the other day's events, so today we will
talk about CL. I'm severely ADD, so I want to talk about something new. Or
I could make fun of all the maroon statements made by people. Because it is
fun. I must admit, I was once a maroon. Like this maroon. "... But that was
not a "normal.” IT was trending higher and then tanked like 40 points in 2
minutes. Now that is funny! He wanted to know what the news was that was
responsible for the sell. Maroon! But I digress.
Lets talk about legs. Legs are hot! So lets look at one right now.
This is the leg down that CL produced in May. This becomes your primary
leg as the price action basically goes sideways at its foot. Momentum to the
upside is trying to build as we see signs of accumulation. There was a lot of
volume that was displaced to bring this price down. But very little has come
back since. And so a large base is forming. Some maroons were projecting
more selling of CL today below 97. Obviously these people have no clue and
probably full of Botox. We will discuss this accumulation process more. But
for now, lets dissect this leg. A and B are the limits of the leg. The very top
and the very bottom respectively. If you break out of A, you will go straight
to the next level of resistance. If you break out of B, you will go straight to
the next level of support. Very simple so far? Good!
Lets go to the next step shall we. This leg can be further subdivided. As you
can see, you can see clear segmentation of this leg (i, ii, iii, iv). Generally
segmentation occurs because a level was encountered, where it was not
tested in the process of accumulation or distribution. Since we produced a
leg down, the process that was needed to help the selling process would
obviously be distribution. So what happens is that we bounce off of those
untested levels (1st touch) and then re-test to plow through them on (2nd
touch) down toward the next level of support. If by chance that level was
already tested, it will be a 2nd touch scenario, which will allow you to
continue down to the next level of support. Now, I brought up that maroon
story up there not because I am so shallow. There is a purpose! To illustrate
the said process just described.
See this:
Then this:
Why did it stop there at 11.25 then made the price go sideways? Because
that level was not tested before during the distribution process from 5/25/11.
The technicals were setup to allow the market to respond accordingly when
the news was "publicly" announced. What you actually think you get the
news first? Because you're special how? O wait...you watch CNBC? You
must be a pro or someone who is really starved for entertainment.
Now you will notice that I have dash lines. Those lines represent support
lines that were lost at each segmentation of the leg. When you arrive at those
lines you should see some resistance. It is only natural right? I will spell it
out. If price action falls below support. That support becomes...resistance. If
price action goes above resistance. That resistance becomes...support.
Simple? Of course it is!
To the left of the leg, we see, 1,2,3 and 4. These peaks reveal to you levels
that were not tested or not tested enough to segment the leg. Most of the
time, you already did a 1st touch scenario before the sell to produce the leg
down. Remember also, that this is an hourly chart, and you may have tested
the levels in the lower time frames. If a level was significant enough when
the price got to it the first time, it will be significant again, when you come
back to it. So the peaks of 1-2-3 and 4 represents the current resistance or
previous support lost. Now, there is also an order that you will gather. Not so
much the numbering, that was just a convenience. But on 1st touch at 1, you
fail, then on return allows you to go to 2. 1st touch at 2 you fail, then on
return, you will get to 3. And then 1st touch at 3 you fail and then on return
you go to 4. So difficult. So for your homework go find them on your own.
No you don't want to wait to identify these "hidden" level after the fact! You
identify them before you get to them so you can actually take advantage of
them. You know make profit. If you don't know how because you have never
been to this blog before. Check the archives. I'll even give you a hint. The
hidden levels are left of the primary leg. Shh...don't tell anyone. So far we've
discussed quantum physics right? Or do you think it was pretty common
sense? Well that is it for this primer. Tune in next time.
Issue 77/89 - Sweet Oily Legs 2
Well hopefully that first primer helped you out and you are ready to embark
on a mentally arduous journey of learning technical analysis. I could barely
get through Stephen Hawking’s The Universe. I was up all night working on
the mathematical models that he was proposing. Yes 1 single night! I really
wished I could have finished the first chapter of that book without falling
asleep in a pool of drool. And I went to Cambridge, so I should be mentally
capable. Cambridge, Ontario Canada. It was a quaint town. So if I am far
from smarter than a 5th grader, the concepts herein should be child's play for
you.
Let’s Review
Legs have ranges. You know like a normal leg, you got the foot of the leg
that ends at the butt. If you pass, the foot of the leg, you will go to the next
significant support. If you pass the top of the leg, you will go to the next
significant resistance. Legs contain significant levels in between. These
levels must be respected as you go up and down the leg. Like when you were
a teenager and hot and excited at the prospect. You decide to kiss from the
foot and because you're a teen, hurriedly thought you could kiss all the way
to the upper parts. But what happens? You nearly bleed to death, because
you busted your nose on her knee. Ouch! Epic Fail!! In the market action,
the levels within the legs will repel the price action on the first try. If you
don't respect that, you bleed your account. The segmentation of the legs is
important to understand. You will be repelled most by the support of each of
those segments. There are hidden segments that may be old significant
levels. These levels may not appear as segment in the leg because it was by
passed due to the setup that created the leg. During the formation, hidden
levels on the leg, was respected earlier. So when the leg formed, it was on
2nd touch situations. Okay take 3 seconds to alleviate your feelings of
nausea. This is daunting stuff.
Let’s move on
So when you finally get to a more significant level of support as CL did
here, the accumulations of the lower time frame slowed the momentum of
the bears and allowed the bulls to take control of the price action. One
method, it employs, is the formation of the John Carter, h. I say John Carter,
because he observed and noted in one of his videos, that after selling the
market pops and drops back down and forms this h pattern. Essentially, what
this h pattern is, is the result of 1st touch / 2nd touch.
There are 3 things to note on this "h" move. The first thing is that price
action pops to the most significant resistance. This resistance is going to be
the previous support lost. Always. The second thing you will note is how
high the MACD elevates. The 3rd thing to note is how high the MACD is
when it creates a new low or failed new low. Hmm...is this déjà vu? Okay,
I'm not going to be cute about it, I'm talking about accumulation. Just
because I talk about new stuff, doesn't mean I've abandoned the old.
What is really happening in an "h" move?
As you recall 1 in the chart is a 1st touch scenario as it attempts to retrace
back up the leg. The resulting accumulation confirmed by the new low on
higher MACD, qualifies it. But, in this hourly chart is actually late in
confirming the action. The accumulation occurs in the lower time frames
first. Buckets. Changes in momentum happen in the lower time frames first.
The accumulation at the new low also represents a few things. First the new
low is also a 1st touch scenario. You bounce again on more bullish
sentiments via momentum. This momentum was enough to carry the price
back up to 1, and so on 2nd touch scenario, you approach the next level of
resistance.
The previous support you lost at 2. And at 2, it will become a 1st touch
scenario. On these pops, the price sells back down. It will go back down to
previous support. You will start to distribute long before you get to that
target on the upside. Because the price just doesn't drop unless it is setup to
do so. So where would you see it? In the lower time frames again. Buckets
of fun.
The next thing to note, is the pop back up. On the pop back up, to 1, the leg
of interest for you to reference is the primary leg. That is where you will
reference the levels that are significant. On the drop back down, you will not
reference the primary leg, but the leg that brought you up. So from the
bottom of the primary let to the top of 1. You will also be wary about the
level below the bottom of the primary leg, because it is a 2nd touch situation.
And if the bottom of the primary leg is not a longer-term level, making it
more significant, you will go to the next level of support down. This is what
I mean about referencing the current price action to the leg immediate to the
left and reference that leg to the leg immediate to its leg so you never lose
site of the progression. Okay, I wouldn't want you to get brain damage on all
these mind blowing stuff here. But we are all rocket scientist, and brain
surgeons, so this stuff is all trivial.
I'm gonna quote my buddy lakai.
BIG thing… Lakai said it perfectly...#1 Learn how to read a chart #2
Learn your techs #3 TRUST yourself #4 Believe it or not George isn’t at
home, please leave a message at the beep. I must be out or I’d pick up the
phone, where could I be? Believe it or not I’m not home!
So far, we've tried to touch on all the concepts we've discussed in this blog to
wrap up all the simple techs we play with. This is how you should think and
work.
Why?!?
Market just tanked on the “news.” So how does this look technically?
So simple my 4yr old can do it. Watch how it’s done Lakai style.
Issue 78/89 - Sweet Oily Legs 3
Well so far, we've looked at past cl moves. For the maroon, they don't think
anything of importance is being said because it’s after the fact. That is why
they are maroons. So don't be a maroon. There is a lot of info that is being
packed in these short issues. What some people do is take pieces of info and
try them out. Now what is really important for you to get is the progression.
Buckets of progression occur to do the setups that you see. Volume
progression and price action progression. What historical data is good for is
understanding the progression that occurred to produce the resulting price
action. The price actions of the lower time frames follow the trend of the
higher time frames. If it doesn't, there is no trend.
Lower time frames have to work their way through all the levels of support
or resistance that may not be evident in the higher time frames. Therefore,
you will see the price action go up and down as a result of it. And due to
those up and downs, momentum is being built up and lost to the upside or
down depending on the direction. And depending on the type of level price
encounters, will also determine the strength of the repulsion experienced at
those levels of support or resistance. These lower time frame moves is what
many traders and aspiring scalpers miss. They feel the pain when they enter,
following the higher trend, the lower time frame stops them out going the
opposite way to generate momentum toward the higher time frame trend. So
after stopping them out, it goes their way. Those who fail to understand this
claim the market is after them. Scream foul play. The problem would be
easily avoided by understanding the lower time frame setups.
What else can we take from the previous issues? There are setups that occur
as a result of accumulation and distribution. Price action can setup 1st touch
situations once you can confirm the process of accumulation or distribution
have started. This is a form of progression that you can track, very easily.
This is why I tell you to track the leg's relationship to the leg immediate to
its left. It will help keep you in context to the larger time frame progression.
It will also help you cash in on bigger moves. The support of the previous
high, top of leg, is often a strong resistance. And the support just above the
previous low, bottom of the leg, is often a strong support. Why? The
explanation is easy. Generally the spots have not been tested by the
accumulation or distribution process because its distance from the high/low.
Ergo...first touch!
When contained within a leg, prices tested on other legs, does not count as
first touch. Price is contained within the leg. The more significant thing to
note, is how the leg you are working on relates to the leg immediate to its
left to help you gauge your position in the larger progression.
In this example there are 2 legs. J and K. Both have tested the same price at
1 and 2.
1 and 2 are not related to each other. They are contained within 2 different
legs and are mutually exclusive.
Now J and K are not mutually exclusive to the primary leg. K is the resulting
progression from J. Because J is the first touch up the primary leg and K is
the result of that first touch.
By request, I'll delve on this a little bit more.
Here is a 512tk chart of cl.
From the low at 97.74, the leg we want to retrace up to is T1. We can break
this up but we wont for now. The setup setup a W from here, where 97.74 is
the new low on the right side of the W. Eventually leads to FT1-1, which is
the Failed Test up to 1. We need to clear this segment of the T1 leg to move
higher. Because there is a significant level here. We also did the same, but I
didn't mark it with 98.96, because that was a previous support. Then we
come up to FT1-2. Eventually by 2:29pm EST, we blow through T1.
Why did we blow through T1?
Because we've been accumulating through the down leg since 4:20 pm EST
Monday. So T1 qualifies as a first touch. Simple as pie.
And that is all for this recap.
"Education consists mainly of what we have unlearned." ~ Mark Twain
Issue 79/89 - Liquidity Games
Liquidity isn't what high rollers have for lunch. It is how they have you for
lunch.
Liquidity Investopedia.com Definition - The degree to which an asset or
security can be bought or sold in the market without affecting the asset's
price. Liquidity is characterized by a high level of trading activity. Assets
that can be easily bought or sold, are known as liquid assets.
People who don't know how volume works ignore liquidity. Some read
volume charts but have no clue the reason why there are times of low
volume and times of high volume. Some people love to watch the uvol/dvol
and get excited with +/- 1000 ticks. But for me, the MACDs were clear why
you would expect them. And it was as simple as trend.
But what does volume and liquidity have to do with each other?
Accumulation StockCharts.com Definition - The act of buying more
shares of a security without causing the price to increase significantly. After
a decline, a stock may start to base and trade sideways for an extended
period. While this base builds, well-informed traders and investors may seek
to establish or increase existing long positions. In that case, the stock is said
to have come under accumulation.
Distribution StockCharts.com Definition - The systematic selling of a
security without significantly affecting the price. After an advance, a stock
may start forming a top and trade sideways for an extended period. While
this top forms, a security's shares may experience distribution as wellinformed traders or investors seek to unload positions. A quiet distribution
period is usually subtle and not enough to put downward pressure on the
price. More aggressive distribution will likely put downward pressure on
prices.
Liquidity Investopedia.com Definition - The degree to which an asset or
security can be bought or sold in the market without affecting the asset's
price. Liquidity is characterized by a high level of trading activity. Assets
that can be easily bought or sold are known as liquid assets.
Volume Investopedia.com Definition - The number of shares or contracts
traded in a security or an entire market during a given period of time. It is
simply the amount of shares that trade hands from sellers to buyers as a
measure of activity.
Volume is what is being produced by these accumulation and distribution by
providing liquidity.
There are people who try to follow the MACD's like I do but fail to
recognize the correct opportunity. They read the accumulation and think that
the market will pop here, no here no here... These are the times when the
market is selling and because they don't really pay attention to what is
happening in the longer-term time frame and identifying the proper levels,
they become lunch.
Liquidity is how accumulation and distribution is actually done. When the
market boys want to sell, they start selling their long positions to provide the
LIQUIDITY for the small fry to buy up the price. If they want to pop it, they
get out of their shorts and provide the LIQUIDITY for the small fry to drop
the price.
There is this talk about supply and demand. The game played with liquidity
is a game of supply and demand. It has nothing to do with the external news
and what not. There are only so many buys and sells being offered by market
makers. So the big boys control many of those positions at the appropriate
time.
So when you notice accumulation or distribution in your lower time frames.
Look at the higher time frame to see the goal and the significant levels. If the
price is dropping, the accu is the liquidity being offered to set up the next
move to pop up the price but also, till it hits the higher time frame target,
more than likely a leg start. The accu is the big boys providing the liquidity
for you to help them get the price to the proper level to pop and for them to
unload all of their short positions and load up on their longs.
If price is going up and you notice distribution, the big boys are selling their
long positions to provide the liquidity for the small fry to drive up the price
and for them to unload all of their long positions and load up on the shorts.
And how we note how the volume is working, by noting the accumulation
and distribution, you see how the momentum is being turned systematically
and technically. Change in momentum happens in the lower time frames.
The lower time frames are subject to the trend of the higher time frames. A
thing we know as trend.
This is what you have to understand about liquidity games. Is this something
new? It is funny how you can read those definitions up there, some of you
may have done so in books or what not, but have you really connected the
dots. These concepts are old. And yes I've talked about them before.
Issue 80/89 - Mountains and Valleys
Valleys and Mountains are prevalent in charts. There is an old adage in the
trading world where people are told not to pick tops and bottoms. Most
people pick tops and bottoms out of shear speculation. What is speculation
to begin with. Lets do a little dogma.
Speculate Merriam-Webster.com Definition - To meditate on or ponder a
subject : reflect b : to review something idly or casually and often
inconclusively.
Speculation is often inconclusive. Just like Cramer can speculate that the
market is very resilient and would be hard for it to sell off. You can say by
the results he got the following day that his thoughts were inconclusive. The
market has so far dropped 92 pts since he declared what he declared. Now in
Cramer's defense, he isn't a technician.
To think that speculative analysis is factual is like buying the Brooklyn
Bridge from me. The other day, there was this maroon in chat, scolding all of
us who shorted the market. Saying that we are contributing to the death of
the economy. And even said that the locals and paper traders were doing a
disservice to America. He thinks the trend is a lie and he trades the news.
Obviously, he can't read a chart. And his way of thinking is not far from
most speculators in the market. It is also the false thinking that the
politicians will lead you to believe that the small retail traders are causing
the market to tank. Retail is not the majority in the market. Retail does not
have the influence as the large banks and institutions that make up the group
we know as market makers do. What is more American than survival of the
fittest and free enterprise?
Why have we gone off in this tangent? Because when people pick tops and
bottoms, it is not based on facts. The use of technical analysis by evaluating
the support and resistance with momentum can get you from conjecture to
substantiated answers.
Now back to picking tops and bottoms. It is harder to pick tops and bottoms
where there has been no retracements but not impossible. You can determine
levels of interest through the use of fib extensions and you can determine
how it will hit those lines by noting the fading momentum. This method is
great when you make pristine new highs or pristine new lows. But when we
are talking about retracements it is easier to pick tops and bottoms. Why?
Because you can look left.
Where do peaks and valleys form in retracements?
All failures on the way up always fails at previous support lost of a
previous peak.
All valleys generally form from the support just above a previous
valley or a significant support from the leg up.
What you have to understand is that failure is always stronger at the leg start
(up/down). Generally, in order for you to move up toward previous peaks,
much of the bottom and sometime the middle is already set up for 1st touch
in the process of accumulation.
And for moving down you get stronger areas of support at the bottom of the
leg, because distribution is wipes out a lot of the top and middle levels of
support 1st touches.
Why then is the support or resistance stronger at the start of the leg? Because
of their proximity to the actual leg start. It will always be the first touch.
Why is this little bit of information valuable?
1st touch scenarios always produce a strong repulsion of the price action.
This is especially true if the level is an old level. Meaning it has a long
history. Many people see the peaks or valleys as price moves closer, the
scalper forgets these relationships and lose out on many significant
pullbacks.
Many times these pull backs are so significant they see their profits dwindle
to negative. Part of the reason they allowed such a thing happen is because
they failed to see the distribution setup in the lower time frames. They only
want to play the 2nd touch goal of passing the level. The bias makes them
forget.
Now in the first chart 1600tk, you want to look at A. "A" is this mornings
attempt to climb up to 66. What is in the way of this move up to 66, was 3
and 4. The peaks at 3 and 4 were posing a strong resistance to the move up.
Now when we look at the 133tk chart, you will see how the distribution (red
in MACD) line as the price moved sideways and toppy.
Effectively, the distribution started at 8:30am. As we get higher highs on
lower MACD, we can qualify the distribution. And we can also qualify all of
the valleys till A as 1st touch scenarios. Where do we finally fail? At the first
level of support lost from the high at 3 which is also denoted by high at 4.
We peaked. Then we get the flush. Where does the price action bottom end?
The support we failed to lose, first level of support reclaimed on the move
up, from the low at 8:15 am EST, which is denoted, by the low at 8:42 am
EST. Now from this perspective, can you say the move, which was setting
up a long time, was random? Can you also conclude that the level where
support was found was random as well? We form the valley. Now take some
time to note in whatever chart you choose, where most of the peaks and
valleys formed in whatever equity or index you want. When you find those
tops and bottoms, examine the momentum. Did they setup for the fade/pop?
You should note that peaks and valleys do form at support or lost support
from the leg or from previous peaks and valleys. Yeah it’s a generalization.
But, when you are scalping, it becomes invaluable when you are breaking
out from consolidation, you can then determine where it will stop.
Here is a different looking chart. This chart is a 1000 carr volume chart.
Volume charts are much cleaner than timed charts and some people prefer
them over tick charts.
Some would be shocked by what I'm implying. That markets do not move
randomly but they actually adhere to some technical rules. Some people
think that even price levels are random. Some people even say that "false
breakouts" are random. Is it possible their chart reading skills are lacking?
No clue how to read momentum? No clue how markets really move? That is
why they make such wild speculation.
Another reason why people fail to see these "false" breakouts? They don't
know how to use time frames. They only use 1 or 2 time frames. They don't
really understand that change happens in the lower time frames. If they did,
they will not be caught on the wrong side of these "false" breakouts. Prior to
the drop described above, there was a guy who tweeted the following. "The
momentum is bullish!" Price then drops 7pts. He had a Cramer moment.
Why did he call the bullish momentum? Because he was looking at a 30min
chart ONLY! What a moron!
Peaks and Valleys or Tops and Bottoms are technically consistent. They
adhere to the rules of support and resistance. By that 1600 tk break down, it
is unclear how the market popped back up so quickly. But when you look at
the 133tk, you will see how the levels were tested on the way down and
recognize the accumulation started long before it dropped. Thereby
qualifying the peaks on the way down as first touches. And knocking out the
significant levels in the process. Random moves?
So to simplify, you will peak or valley at levels during first touch. You will
see many peaks and valleys form during the process of accumulation and
distribution. Do peaks and valleys serve a purpose? Yes! They not only
highlight significant levels, but during process of distribution or
accumulation, they set up larger moves to bring you further down or up a
leg. How will you see how momentum will help form at these first stops?
You look at the momentum and price action of the lower time frame.
Thanks FMM for helping me write goodly English.
Issue 81/89 - Legs Untangled
Legs can get all tangled up and can be fun. But people can muddle up legs
on their charts and get all discombobulated. Lots of people say they have
levels all over the place. Some would probably draw all the lines and make
their charts so busy, you can't see the candles. I don't see why you would go
overboard with them lines. People want to scalp but then they look to play
off the hourly, 2-hour or worse off the 4hr. I mean sure you can see a nice
setup off of those time frames but to scalp? Them time frames ain't for
scalping. Them time frames are for you to get levels of importance that is
relative to current action. Wouldn't it be better if you just pay attention and
mark up the lines that are significant for now? What is currently possible?
Then comes the comment about indicators not lining up with each other. Or
I'm accumulating here but distributing here. How can you accu and dist at
the same time or dist and accu. Muddled thinking sets in and people can't
relate the action of one time frame over another. Generally the problem is
they see what is going on in a higher time frame, then become befuddled
because the lower time frame wants to go in the opposite direction.
Seriously, this excuse about indicators not lining up, really strengthens the
fact that you have no understanding of time frames and how markets move
all together. Yes you do get larger moves when they line up. But there are
other ways in which indicators line up other than how they are pointing.
Ever consider progression?
People make everything too hard. And because they lack understanding they
rely on the news as a crutch to support their views or bias or as a source to
find blame their miscalculations. The other reason is they really lack
understanding of basic TA. You must have a solid idea of basic TA to apply
them to what we discuss in this blog. But instead, they implement the basic
fundamentals inconsistently and improperly. They don't even understand
what support or resistance are, how they work, why they are significant and
how to identify them.
Common sense tells you that if you have lofty goals from the 4hr time
frame, you shouldn't expect it to come to you in 1min. You would think that
that would be a no brainer but people have those expectations. People think
that things in the charts just happen. But the charts tell you they must set up
everything that happens. Legs also setup. In order to play legs, you must
understand the progression. You must know what has been tested before.
You must know how the market has moved to setup a pop or a drop in the
time frame you are looking to play in. So in order to position your-self
properly if you are playing the 4hr chart, wouldn't it be helpful to understand
how the shorter time frames have setup?
Common sense? Probably too common for some. The correlation that you
should be aware of is how your charts of long and short time frames work
together. People put so much effort correlating other market entities when
what matters most is already before them. Charts develop over time. And
you must work to understand how progression of price action sets up the
moves that come. How do you know things setup over time? How do chart
patterns develop? People love to deny the obvious because they are so brain
washed about the news and correlations. And brain washed about other
things they think they know that have no real bearing or fail to bear
consistent fruits. In order to untangle them legs, you got to clear out the
myths and focus your mind on the single entity being described on your
charts.
Market correlations are many. People accept that they work until it doesn't.
And yet this inconsistency is used by many as a crutch for using the daily.
People say when the dollar goes up, the market should go down. But in
recent weeks, there have been examples when it did the opposite. You want
to know why people become overwhelmed while trading? They need extra
monitors to check their correlations.
Legs as a concept are quite easy. When going down the leg, you will bounce
at the support that started the leg up. When going up the leg you find
resistance at the support lost that started the leg down. It is not difficult to
understand that the leg you are currently retracing up on can describe how
you are progressing in the longer-term setups. If you are distributing or
accumulating in the longer-term progression, you will notice that the market
is going side ways. Legs will test the significant levels to allow for the
bigger move up/down during the accumulation and distribution phase.
There are 2 key points where you will find strong support or resistance on a
leg that is produced as a result of a pop. Near the top of the leg where you
find the support of the legs high, you will find strong resistance. Because
that spot will always be 1st touch or 1st test situation when you retrace back
up to it. If you do not have strong momentum when you get there, you will
always fail. How do you determine the momentum leading up to that spot?
Look at the lower time frame. Where will you experience the resistance and
see magnitude of its influence? Lower time frame. How do you gauge the
magnitude? Do you have significant momentum erosion signaling
distribution? Do you have a chart pattern to show how it is topping on
approach? A chart pattern? Yes, the price action will tell you what it will do
and should coincide with weakening momentum. Don't ignore price action.
Don't ignore simple chart patterns. Do we not use chart patterns to help us
see progression? Logical? Common sense?
The other spot is near the bottom of the leg where the move up started from.
When you retrace back down a leg whose origin is from a pop, this level of
support where the leg up started from. It will result in a pop when you test
down to it because it will be a first touch scenario of that level of support.
How strong? How significant? Same line of reasoning as above.
I'll leave it to you to figure out how things work when the leg you are
working on is a leg resulting from a down move. Seriously if the thinking
behind it is not consistent with the thinking with a leg that resulted from a
pop, then don't bother coming here for technical analysis.
The extreme ends of the leg help you understand progression. You must
relate the tips with the leg immediate to its left. You will understand if you
are progressing up or down. A signal that you may be accumulating or
distributing. Are you in a series of peaks forming a consolidation? Are the
peaks in this progression working in an upward progression or downward?
In relation to the price run that started the consolidation, did the price drop,
and are we consolidation to accumulate or did the price run up and we are
consolidating to distribute? Are we basing/topping enough to effect a
momentum change in the longer term or is this a temporary pause? Is this
pause in response to a first touch situation? What is going on with the
momentum? How is all this looking in the higher time frame? Am I at a
significant level of support or resistance in the higher time frame? If so, do I
have a significant price action to suggest some kind of accumulation or
distribution pattern? Am I at a 1st touch scenario? Am I on a second touch
scenario? If I am, do I have enough momentum to break through, because
I'm on a tick chart and I may be accumulating? If you are not going to bother
to try to understand what is going on, how can you trade? Well this is all
getting to complex. There is so much to think about? If you were
accustomed to thinking in this matter, the answers should come to you at a
glance. I must also state, that some of these questions can be lopped off from
consideration depending on the situation. And no I wont elaborate how to
determine what to lop off. You have a brain, use it!! If you want to be
effective at chart reading and trading? Why would you not bother to develop
the skill?
Have fun! Dawg is out on vacation. See ya in 2 months.
Issue 82/89 - Do The Hoffman
Well I was told the Robert Hoffman of Power Charting blew up during a live
trade to a tune of over $300k. The following charts will show you why he
blew up. Apparently he was long just before the high on Thursday. Don't
really care to know where. Evidence in the charts show, he failed to read
charts.
Bearish momentum pop back to previous high lost support then sell hard!
Distribution from previous day sent you down to Thursday's low. Did you
get an accumulation setup here? NO! In fact, same kind of pop to Thursday's
high, 1st touch on more bearish momentum. The pop from Thursday's low is
on 1st touch scenario on succeeding bearish cycles on the MACD. Therefore
you can expect a continuation of the move down. So where can it go from
there?
Death by progression. TF has been distributing since 6/21. The Tuesday
before was a 1st test scenario. If you look at 7/7 + 7/8 on the daily chart, isn't
that a Hoffman 2bar?
Martingale averaging down strategy help kill the account to avoid a losing
trade. And add a case of no clue what the charts are saying. Gives you
Peggy! A prime example of how Hoffman ended up at the receiving end of a
defecating elephant.
Issue 83/89 - Market Down! Market Up!
When you listen to the "analysts" on TV you get a feeling that these people
are as clueless as everyone else. You also get the feeling that when the mic
gets in front of them they start to speak their political mind. The interesting
point is to note the duplicity that these media people portray. This duplicity
is mirrored by traders. Just sit in a chat room and you will see how traders all
reflect the exact duplicity in their way of thinking. What is this duplicity?
Ask them why the market went down.
Trend is an interesting phenomena that traders strive to be in right side of.
But yet, these traders, economist, floor traders cannot tell you that the
market is down because of trend. they will tell you that the market went
down due to the uncertainty in Europe, and the US. They will tell you how
Pres. Obama failed to provide jobs and his socialist policies have hurt the
economy. Ask these same people how their profitable trade worked, they
pull up a chart.
If you understand technicals, why rely on funnymentals? People caught or
surprised the market situation most assuredly cannot read charts. If they
claim to know how to read a chart how is it possible that they missed their
weekly charts? How did they fail to understand the distribution that has been
in play. Where are those people calling for the moon with market prices
above 1400? Is 1400 still at the top of the trend line?
This guy asked me the other day. How do I know that the short time frame is
not gonna break the higher time frame trend? The answer is simple. Trend.
There is no such thing as trend if the short time frame can break the long
time trend. The real question he was asking pertains to market manipulation.
The notion of market manipulation is for people who don’t know how to
read charts. The reason for this is because anything that goes into the system
cannot be hidden in the charts. The other crutch that people use the news and
events. If you truly want to be a technical trader, turn off the TV and don't
listen or read or entertain the news from chats. You will feel liberated.
What are people not getting about trend? The short-term trend follows the
will of the long-term trend. What are the politicians missing? The market has
set this trend a long time ago. In order for them to change it, they must offset
the volume that was put in place since 1990s. You've read me rant and rave
about funnymentals. Today, EU wants to limit high frequency traders. Can
you say idiot? If there is anyone that should be restrained, arrested and put to
jail, it’s the (((bankers))). But I digress.
Well that is it for now. I've been away for bit and it has been nice. I have to
warm up to blogging again. Grats to BJ and a few others who have had
marked improvements.
Issue 84/89 - Indicator Trader
There are only 2 lower study indicators that I use. And those of you that
know me, know exactly what they are. Obviously, you can see my charts and
you will notice what they are. The thing that I would like to emphasize is
that these indicators are volume sensitive. And reactions to volume can be
gauged through comparative analysis. In my geek speak, you will compare
to adjacent time frames to see the effects of a lower time frame progression.
The higher time frame, is the trend. I'm not going to go over the whole
concept, you can read about them in earlier issues. Indicator based trading is
really fun when volatility is high. Indicator based trading is really effective
when you can gauge the flow of volume properly.
Volume Flow Is NOT Consistent!!
When people read the indicators, they think the thing that is moving it, is in
constant and equal flow. That is far from the truth. This is why I tell you to
understand comparative analysis. I learned about volume flow at the time
that the market was very volatile. Do you recall the wild fun swings of the
crash from 2007-2008? Those were the fun days. It was a great time to learn
about how the indicator moves. If you were really paying attention, you
could see exactly how volume drops and pops correlated with price action.
You would also realize how price action could follow your channels and
price action patterns.
In today's market action, if you are trying to learn how all this works, it
would be more difficult. Volume has yet to compare to those good old days.
If you were to try to learn it today, you would really need to pay attention to
progression to understand how momentum builds up or dries up. Progression
on one time frame may be bullish, but if it doesn't affect the adjacent time
frame in the same manner, it may mean that the higher time frame next to
your adjacent higher time frame is actually bearish and its trend will be
followed. Huh?? Again, practice, and observation. That is how you learn to
be a technical trader.
Trend is real. People think everything moves at the whim of the news. Like I
was trying to say in the last post, you really have to be careful about
listening to the news. Case in point. The market dropped due to concerns
about Greece and European economies. The next day, Intel had great news
and wiped away the previous day's loss. Where is the logic in that? European
economy could blow away American imports and exports. American
economy could be affected in so many levels and yet, lowly Intel, though
international in nature can have an equal or greater effect to wipe away such
global economic concerns?
In the technical perspective, each of the moves were technically supported
by a distribution to sell to the leg start, then first touch pop with the
momentum setting up the prior to reaching that leg start, an accumulation to
help the pop. Technical moves are easier to understand than to try to
decipher all the news and fundamentals. Why have a charting package if you
don't get how to use them?
Price action always follows trend. Volume that comes in is also subject to
trend. The two are related. So if you are indicator trading or reading them for
momentum. Study how its flow works before basing your trading strategy on
generalizations. Understand how progression of lower time frame, affects
the higher and vice versa. Don't go in blind. Been there, done that. The next
thing you have to do after figuring out how those indicators work, see how
they relate to price action and then levels.
Issue 85/89 - How To Weee'd A Chart –
Part 1
If you're wondering what the hell "Weeee'd" is, it’s a play with words. I
really meant read. Even in our little group, the skill of reading the chart
properly is lacking. It is a confounding issue. What is actually happening is
that people don't incorporate a lot of what they learn to the basics. It just
seems people would progress faster if they actually understood the basics.
But what are these basics?
Basics include the vocabulary. Not just being able to talk the talk. You can
go into any chat room and you will find people who can talk a good talk. But
if you ask them to explain the exact detail, over 90% will fail. Where they
will defer to is to talk about the news, politics and whatever else that is not
in the chart. I know people who still don't know how to identify support and
resistance. Some don't even know the significance of congestion. People still
think that congestion is where the "market" is deciding where to go.
There are really 3 things that make a chart useful. Price action is what people
note. They form patterns and the price moves up and down as candles form.
The second thing that people should notice that these things appear on your
chart over time. See, this is an important point. As candles propagate the
chart, time elapses. Price movements show how momentum changes over
time. And on that note, what is momentum? People identify chart patterns as
momentum changers. They talk about wedges, and how at the top or bottom
of a wedge, there are more sellers or buyers and so price drops or pops.
What is it exactly? To be really accurate, it is volume. Did you really think it
was actually buyers and sellers sitting on some line? No! The description is
figurative. Do you know how many people couldn't really explain what that
means?
You see, only volume can really be the underlying thing that makes
momentum make sense. With that as the underlying thing, it explains what is
being distributed in distribution patterns. What is being accumulated in
accumulation patterns. If you have to ask what those patterns are...it just
shows you how much you know. But what is it that makes up the volume?
Buy and Sell. Those are the only inputs to the market. You buy to go long
and you buy to get out of your short. You sell to go short and you sell to get
out of your long. No!! It’s the news!! If you believe me so far about volume,
then it isn't very far from logic to conclude that in order to make the price go
up or down, momentum must be set up to do so. It won’t be difficult to
conclude also that if you could note what is going on, you can possibly
follow trend.
There I said it, trend. Trend is the result of the offsetting of these volumes.
Trend is the product of accumulation or distribution. Trend can be short or
long. Trend is stronger the higher the time frame. Take a look at your weekly
trend. Based on the weekly trend, how long has the momentum been
bearish? If you conclude that the currently trend is due to the global
economic issues on the news today?
You are dead wrong. Fundamentally, the economic issues have been building
up for years and decades. Technically, if you can read the momentum, it has
been that as well. When has the momentum been weak? Since before 1999.
But why did we pop up so high? Because the monthly outlook of the market
was bullish. And the progression of the weekly must occur first before it can
affect the monthly. What does that mean? Change happens in the short time
frame first. Buckets of volume over time. The larger the time frame, the
larger the volume it represents. For example: 133tick vs. 1600tk – some may
argue that tick charts do not represent volume. But they do. It’s just a
different unit of volume. While you can have carr based volume charts, tick
charts is just like saying dozen or packs of something as oppose to the actual
unit.
The difficulty with some people is to understand that in situations like the
one above is actually playable. The problem is, they live in a world of
impossibility. I could tell you that this is an hourly. I could tell you that this
is a 5min chart...but regardless of what it is, the shorter time frame will show
you how this becomes a playable chart. Oh this happens too fast! Some may
complain. Again, depending on your perspective.
Now when you look at it this way, how playable is that weekly chart? This
also illustrates why things don't just happen. They must be setup to do so.
Some people don't get where this distribution came from. They just don't
understand that the work of volume offsetting that has been occurring since
10/10 in this 4hr chart at 1180 to the 1180 on 11/18, that there is a giant
negative divergence. There are clearly less buying happening and more
selling since 10/10.
I've peppered this blog with definitions and illustration of those definitions
and examples of whatever it is. It is just to help build a common dialogue
and also build what is necessary for you to gain basic knowledge. What is
distribution? How does it look like? What do the price action do? Some
people even refuse to learn how to spot certain chart patterns. Those patterns
are commonly discussed because the market does the same thing over and
over again. You would think a basic chart pattern is something you would
want to learn if it occurs over and over again so you can capitalize on it. You
would think that you would study how it developed over time and try to
recognize the momentum as it formed. And how would it look like in a low
time frame. And what does it look like in a higher time frame. Where did it
occur with respect to the leg? Easy questions but it takes work.
That is it for lesson 1. There is a plethora of information that you must digest
off of this one issue. The problem is some will try, and some wont. Some
will brush it off as common knowledge, because they already truly know.
Some will brush it off because they think they know but when it is time to
recognize it, they fail miserably. Well good luck!
Issue 86/89 - How To Weeee'd A Chart –
Part 2
Well, someone just forced my hand. Someone from Grapevine, Texas. We
will talk about Volume next.
I think you have missed the difference between accumulation and
distribution based on volume. The lack of volume from the dates posted
above does not denote distribution or accumulation. The area of the chart
that is missing is 7/25 to 8/8 is a good example of distribution. From 9/12 to
10/15 is accumulation. Any certified T/A person would easily see this in the
volume you are discussing and would consider this a mild pull back before a
continuation. Mild pullbacks are healthy but not an indication of direction
until accumulation or distribution comes in to start the next move or leg.
Anonymous, Grapevine Texas
To answer the comment. I believe I know what accumulation is and clearly
what distribution is. However, since the anonymous person eludes that they
are a certified T/A person. "Any certified T/A person would easily.”
Volume
Everyday people note what the volume that traded in the market is or was.
Volume is basically all the trades for the day. It can be further subdivided to
2 components. Advancers vs. Decliners. Buyers vs. Sellers. When you talk
about advancer's, these are buy orders. When you talk about decliner's, these
are generally sell orders. Lets keep it that simple. I think many people can go
on about it with tons or rhetoric. In simple terms, overall volume consists of
buy and sell.
Volume when it comes to momentum, is about the cumulative effect of the
buying and selling that goes on in the market. Cumulative means that all the
buying that occurred will contribute to the outlook of what is already in the
history of the stock or market as well as all the selling. If for instance, the
stock has experienced primarily mainly buying in its history, then the overall
volume of the said stock consist primarily buy volume.
Why is volume so interesting? Why do we even talk about it? Because it is
what makes up the overall momentum. It also helps define the trend. It is
what is being offset to produce periods of accumulation or distribution. How
so?
If the stock or market experiences primarily, buying, it doesn't really mean
that there were no selling. It just means that the overall volume was buy
orders. And of course you will have sell orders. Why? Because there will be
people who will sell to take profits. Some people are also trying to short it.
Over time, if the amount of buying tapers off, the cumulative volume that
already has taken place in the stock/market that happens to be selling, will
offset the cumulative buying volume to make the stock go down. It is a
mathematical process.
So let us talk about this Accumulation and Distribution.
Accumulation StockCharts.com Definition - The act of buying more
shares of a security without causing the price to increase significantly. After
a decline, a stock may start to base and trade sideways for an extended
period. While this base builds, well-informed traders and investors may seek
to establish or increase existing long positions. In that case, the stock is said
to have come under accumulation.
Ah, this is one of the first blog entries I wrote. And so our reader said thus:
"From 9/12 to 10/15 is accumulation."
Well let us see the chart for what our reader was referring to.
The first chart is the weekly. And the 2nd chart is the 4hr.
First lets look at his weekly. The leg going down at 9/12 to the pop is his
(just to help me out, I’m gonna give our person a male gender, I'm sorry if
you are actually female, no offence.) accumulation. Does it fit the definition?
"The act of buying more shares of a security without causing the price to
increase significantly. After a decline..."
Nope. Because it went down first then popped. The price did change
significantly from the said period. There is accumulation that occurred there
at the 10/3 area, but the strength to push the price up all the way to 10/24
high actually the result of the accumulation from the tail end of week 8/1 to
about 10/10.
Is this not what accumulation should look like based on the definition
above? So what you have from 8/1 to 10/10 is the sideways movement that
is by definition of what accumulation is. And then the resulting pop. Now
this pop in the weekly is not a strong bullish accumulation. This is where
some people will say there is a "hidden" divergence. Go read my blog entry
for that. I'm not going over that again.
Now let us discuss what happened in 10/3 for the pop. As I've said, the pop
that perhaps our reader suggested, is not the pop responsible for the larger
move that occurred overall. The momentum is the product of the
accumulation as discussed above. What is responsible then 10/3 pop?
Well there are 2 factors here. 2 time frames:
1. The weekly trend built up by the accumulation we noted above
wanted to pop this up.
2. The shorter time frame (which we will see next) shows you the
pop that occurred on 10/3. Is also in response to the larger time
frame trend. Higher the time frame, the bigger the move. 8/1010/10 is the wide base, that my chart expert teacher, Asbucky,
taught me, will be followed by wide space. The big pop up the
start of the leg down of the previous high at 7/4. 1st test pop,
ergo, we pull back.
Now this is a 2-stage accumulation with a new low produced. The
accumulation was built up by the buying that occurred from 9/22 to 10/4,
produced a positive divergence in the MACD. Boom!
Honestly, I don't recall saying lack of volume. But I do recall saying lack of
buying. Does that not seem more accurate? If you were to draw a wedge, to
that said spot where we sold, isn't that the proverbial bear wedge? That as
you go up the wedge, you will increase in sellers and decrease in buyers?
How do we see the said distribution?
Interestingly, I made this chart a few weeks ago to show that volume
dropping to one of my buddies, who is trying to learn to see how, instead of
volume charts, I use the MACD. And you can see the weakness here already.
So lets look at the reader's point about distribution.
"The area of the chart that is missing is 7/25 to 8/8 is a good example of
distribution."
Now, according to this chart, he is actually saying that the move down is
distribution. Hey, this person is potentially a certified T/A. I can't argue but
to use the facts as defined by other experts hired by StockCharts.
Distribution StockCharts.com Definition - The systematic selling of a
security without significantly affecting the price. After an advance, a stock
may start forming a top and trade sideways for an extended period. While
this top forms, a security's shares may experience distribution as wellinformed traders or investors seek to unload positions. A quiet distribution
period is usually subtle and not enough to put downward pressure on the
price. More aggressive distribution will likely put downward pressure on
prices.
Do you see the similarities in the definition of Distribution and
Accumulation. It isn't the resulting pop that is accumulation. And neither is
the resulting drop that is distribution. It is the sideways movement of price
and offsetting of bullish/bearish volumes to bearish/bullish volume
respectively. So our reader is against the definition provided. How well is the
definition given?
A picture is worth a 1000 words.
So what was I referring to in the previous blog entry?
Is it not the same?
Now a little more about volume and dropping of volume: Volume can drop
and it does so regularly during the day. If you believe that there is such a
thing as trend, you will also understand that when volume drops, the
trickling in will always follow the greater time frame trend.
As you can see in the charts, when it comes to the divergences, the process
of accumulation and distribution takes time to take affect. Dropping of
volume does not necessarily mean that you can expect an immediate turn
around in the price action. That depends also on the time frame. But if it
does drop, the greater trend will be followed. That is just what you should
expect because it is the trend.
Thank you for a very excellent blog comment.
Issue 87/89 - How To Weeee'd A Chart –
Part 3
Okay, so we sorted out what momentum is and how it is generated. Those
are part of the basics of momentum. And the key thing about volume is the
type of volume coming in. And then, how it will change the outlook
overtime as it progresses. Again, what we are going over are basic tenets that
you should understand when looking at a chart. So far what we have covered
is a lot of rocket science. Mind blowing stuff.
The next thing to understand is the price action. And how you can relate
what is going on in the momentum, to the price action. Again, the point here
is that if the market will pop or drop, in whatever time frame, it will setup a
change in momentum to facilitate that move. Change will always start in the
shorter time frame first.
When it comes to price action, you can gain a lot of insight on how the price
and momentum has moved and should move. You can also discern the
process of accumulation and distribution. These are generally manifested in
those many chart patterns. It is well worth your time to become familiar with
chart patterns as they can give you some confirmation of what you are
seeing. And it is also well worth your time to understand how momentum
looks like when such patterns work and fail. Since the market does the same
thing over and over, you should find commonalities in the momentum with
the price action. A type of finger print if you will.
Now remember this chart? I purposely removed the price and the time frame
because people make quick judgment about what they are seeing. This is the
weekly chart of the ES, and the peak that we see here, with the big candles
and such, many would say that there is no way to understand how to play
that. The candles of 10/24 - 11/14. To tell you the truth that is how I thought
before. Now as I've said, that change happens in the lower time frame first.
When did the distribution start for this same chart but this time in the 4hr
time frame? It started at about 10/11. That is how the lower time frames can
show you how change is happening. How the weekly candles from 10/24 11/14 was produced. People have to learn how to use their charts and time
frames to their advantage.
Now why did this structure in the 4hr seems so huge comparatively to the
weekly? Could it be that it is because the weekly is a huge time frame? Of
course! You also have to get the proper timing of setups and must understand
that the higher the time frame the more significant the setup is on the lower
time frames. Quick question. If you are looking at a huge time frame like the
weekly, does it represent more volume per candle and therefore more
volume over time done that of a 4hr chart? If you can answer that, then
maybe it will make sense, as to why it took so long.
Here is our leg down from 7/4. When we popped up to where you see #4.
That is the fist test of that previous support that we lost the week of 8/1. And
the rule is. First test you will fail. So what did the 4hr tell you? That since
10/11, it was already distributing to prepare for the move down. Was it the
news? Do you need a PhD to understand this simple concept? But then you
will say. "Dood. This is on a weekly and 4hr basis." And I will respond back
with. "Dood! I'm not gonna hold your hand. Do your own research in the
lower time frames and see if it does it too!" If you do find that it does, there
you can probably say, there is consistency in the technicals. And you will
then scoff at the person who said. "T/A doesn't work because the
fundamentals are too volatile."
Well that is first thing you should understand about price action.
Issue 88/89 - How To Weeee'd A Chart –
Part 4
Happy New Year! Alright the last few issues we saw how momentum works
through its 2 engines - Accumulation and Distribution. We also saw how the
price action looks during these times when momentum is shifted from
selling to buying and vice versa. We touched on a little bit on how legs help
you determine how levels are gained and or lost. This last bit of info that you
need to start understanding what you are reading is one of the most
significant things you must learn to spot significant levels. The only way to
spot them is by reading and understanding the price action. These things are
called “levels,” “support,” “resistance.” Some other people call them "poc"
and all its variations (vpoc, mr. spoc). People don't get these levels and they
don't really understand why the market did what it did because they don't
know that the price will always target the previous support it lost that
eventually allowed the price to cascade down to where the price found
support to start the rally or move up. People come up with stupid calls like
"false pops" and “false drops.” Logically they can't say it was false because
it happened. But if these were logical folks to begin with, they would
understand that the market consistently move in the same manner over and
over again and there is no such thing as false pops and drops. It’s just idiocy
to think that way. It also gives them an escape should they fail to read the
move correctly. "Oh yeah, it did this false pop/drop just to shake me out of
my stop and you know those big guys are taking my money."
The progression is clear. What are false pops and false drops? If you read a
little bit about legs, you would understand that those "false" whatever always
seem to hit, the leg start. Through that simple mechanics, it is far from false,
but a constant function. And we know that the momentum is setup through
progression to support the resulting move after the "false" move occurs.
False whatever will always happen near a leg start.
What is a leg start? Leg starts are significant levels of support or resistance.
It is generally near the tops or bottoms of a move up or down. They are the
level where you will find your consolidations forming their base whether it
is a peak or valley. It is the initial level of support and always the last level
of support to be tested on the leg. Understanding how to identify levels of
support/resistance and differentiating them as leg starts and understanding
why they are key levels is a skill that a trader has to gain.
I won’t go over the entire blog entry on peaks and valleys, but what is key is
what the key level of supports are from those peaks and valleys. Peaks and
valleys are the start of legs. Their tips are the result of testing of previous
support or current support. And they are key in the progression of
accumulation and distribution as a collection they are the top part of head
and shoulders and double top or their inverse chart pattern counterparts for
accumulation patterns. And they are also produced as juts up/down on any
move up or down which are more prevalent in lower time frames. So far, all
I've told you is obvious stuff.
So lets talk about something not as obvious.
When retracing back up/down a leg, one way to find a key level at the peaks
or valleys is to find the candle that closed above (for the move up) or below
(for the move down) the key level of support. In order to do this, for the
retrace up the leg down, you must understand the move up from the leg
before your move down. Generally both these levels for the move up or
down are the same level.
Off this weekly chart, in order to understand why this level here is
significant, you can first get your first clue from the immediate leg to the
left. From here, you are interested in the 12/20 candle. This candle closed
above a significant level of resistance in order to gain a level of support. And
the 12/13 candle demarcates the level of interest as the level that it could not
close above of, by wicking there.
Now sometimes the candles are not so straightforward. That is why I suggest
that you look to the leg to the left of the current leg.
When you zoom out, you get a better sense of how important a level is. The
logic of understanding the mechanics is simply: what is the level that a
candle such as the 12/20 candle had to close above in order to gain a level of
support. The qualification is gained by looking at the price action where the
level acted as resistance: first by wicking there as resistance or support and
second by dojis. How do you localize these areas? Look for peaks and
valleys. Look at the level where they congest. Look at the base of their
congestion. And then look for the relationship as described above.
As you can see from this example, the support found in 3/14/11, was a
support they tried to hold from 7-9/08 and 5-7/06, was a level of resistance
in 7-9/05, support in 5/01, 10/99 and then finally the level of support gained
in 12/28/98 that was the level of resistance in 12/21/98.
So how does it look in a daily perspective or a lower time frame? Much like
the weekly as you can see the expected relationship or mechanics is
observed. An area of consolidation before the move up is also, a leg start. It
is all just rocket science.
Issue 89/89 - How Weee'd A Chart - Part 5
Yeah it's been a while since I've written something or even write about my
angst about some maroon. What should I write about anyways when
everything about chart reading has been said. But I should state the more
obvious and less trivial and most logical of all. Enter big angst.
Lower Time Frame Follows The Trend Of Higher Time Frame!
It's completely technical. It's completely logical. But why do people think
that the lower time frame can do the unthinkable is beyond my
comprehension. Perhaps all the pre-conditioning of hearing about false pops
and drops but people who read this blog still do the same thing. The problem
when I listen intently to what the issue is, is they completely lack the
understanding of the basic concepts of what technical trading is. Seems
pretty harsh but that is what it boils down to.
Sure they have bits and pieces. Sure they can identify what certain things
are. But when you press them to explain it from one time frame to
another...the simplicity that they know. The simplicity that allows them to do
what they already can turns into mental diarrhea. It becomes completely
obvious that the thinking employed to read the chart is really gimmick based
not by clear concise thought. If your thinking is not in the infantile gimmick
phase, you would be able to see the momentum, see where you are in the
price action phase as momentum shifts and know based on the leg where you
are and how is progression building up or down momentum. Sure they can
regurgitate the content from blog to help them along but the full meaning
fails to register when they go from one time frame to another. The thinking
process goes from simple to insane complexity in 3 seconds.
Momentum, Price Action And The Leg ... And Brain Damage
Where they fail is at points of consolidation. Ironically these are the points
where accumulation and distribution occurs. The place where a leg start is.
The place where they know momentum shifts as liquidity changes the price
action from moving singularly in one direction up or down to sideways. So
you ask them, here is the leg start in the 15 min chart, what should price do
when we reach this previous area of support or resistance? Should it bounce
back or run through on the first attempt? They will answer correctly that the
price should repel. Then you ask them, where should you see this change in
momentum happen? They will then correctly say in the lower time frame.
Ask them why. They will say .. Change happens first in the lower time
frame. So they go to the lower time frame and that is where the "brain
damage" (say it the Bill Cosby way) occurs.
It's been accumulating but the price continues to go lower. Did it reach the
leg start yet you ask them. No answer. Then they say well its been sideways
and been choppy. It just keeps going up and down. I think it will go lower.
Then the price pops up and kills them.
It's been distributing forever but the price keeps going up? Did it reach the
leg start yet? I just told you it has been distributing but the price keeps going
up. It isn't doing what it should to go to the leg start. So they go long and the
price drops and kills them.
Then they say...
How the hell did it just pop or drop that hard when all it was doing were
these little pops and drops? Major Freaking Brain Damage!
What is going on? Why so brain damaged? It really is quite an annoying
problem. From my perspective, the lesson has been taught in many ways.
Biggest clue is how a 2bar reversal can look like a head and shoulders in a
lower time frame. It was a huge paradigm shift for me when I realize the
significance of that notion. This is a huge hang up if you really don't put two
and two together. While price action is producing this huge distribution or
accumulation pattern as the price action goes sideways in the lower time
frame, and probably 1or 2 candles in the higher time frame,
3 things happen:
1. They forget the higher time frame 1st touch
2. And in forgetting, they think the move will bust through that
higher time frame level.
3. This happens because they forgot that they are moving sideways
from the original leg.
The brain damage goes on further.
They ignore the decline in the momo. They have no clue that the sideways
movement with the decline in momo were breaking down levels of support
or resistance for the first touch – ergo even fail to recognize the progression.
They fail to see, to recognize basic chart patterns and how they work. That
as you progress further to the left...you break down the momo of the bigger
leg where the sideways action started from. What does that mean?
When price moves sideways...what was it doing before it went sideways?
Since I really do have to spell it out. If you look a little further left...you
should see a big leg up/down. You would think that if you see a first touch
coming from the higher time frame, that people who claim to read this blog
would come to the clear and logical conclusion that the lower time frame
would start to dist or accu by losing momo as the pa moves left, as the pa
gets new lows or new high on lower MACD, as the pa goes toward that
higher time frame level of support or resistance. Why? Is it not by definition
that accu happens after a move down and dist after a move up? To prepare
for the expected response for the 1st test of that higher time frame level of
s/r. And while all this stuff is happening...why do people still ask where will
it go even if they recognize the set up? Do they not understand the
progression and legs? Obviously your target should be the leg start that
hasn't been tested. But it is the obvious they want to disbelieve. It becomes
so obvious that people are oblivious that even the basic chart patterns,
definitions, and constant repetitive way that price and momo moves or
behaves is not readily available to them. They only know the setup they like
to play but even in full detail. Oh hey this is a double top this will move all
the way down to the leg start. and then pops hard at the leg start of the first
valley.
Goes back to level of understanding. What they don't get, they make up.
Sometimes the rational provided is incredible. Almost like listening to the
news. The effort to understand is limited to the gimmick trade setup that
becomes their favorite arsenal to trade. It works till it doesn’t. There is no
real understanding even if they get it right. They couldn't describe it to
specific details and conditions. And so if they are not savvy enough, they
play those gimmick moves they adopted in the wrong situation. They go
long to the moon when they should have shorted or short to china when they
should have gone long.
Don't be brain damaged. Learn to put it all together!
The last blog post had these two comments – last comment is by Kewltech:
Anonymous March 10,2013 at 11:34 PM
Hey Kewltech, this is my second round reading the entire blog. Notice that a
few episodes are missing like 6, 16, 36. Some glitch perhaps?
Kewltech March 12, 2013 at 4:02 PM
Nah left them out on purpose. Something's people have to think through on
their own.
THIS MARKS THE END OF ALL
KEWLTECH BLOG POSTS.
Spaztik’s Supplementary Blog Posts
(Recommended by Kewltech)
Technical Analysis. The only way to trade. Focusing primarily on
stocks to demonstrate the proper use of technical analysis in the
financial markets. The charts and comments herein are based out of
my technical analysis. Trade at your own risk. This is licensed under
a Creative Commons Attribution-Noncommercial-No Derivative
Works 3.0 United States License.
From:
https://web.archive.org/web/20150811035648/http://spaztiksstockpl
anet.blogspot.com
Issue #1/6 - Introduction
These posts will supplement Kewltech’s information as to the price
mechanics of the financial markets. In addition, I will attempt to demonstrate
that stocks, Forex, and the futures' markets do NOT move in a random
fashion as most would have you believe. Rather there is a structured
progression/process in the manner in which these 'entities' move. Last but
not least of all, this will NOT be a blog where Elliott Wave is part of the
conversation.
Issue #2/6 - The 3 Amigos Are
Approaching
Have you ever looked at a chart and wondered what the heck is the chart
telling me? Is it saying the instrument in question is going to move to the
upside, downside or nowhere at all? How can one decipher all of
this random noise? Well, this blog will cover the key 3 elements that convey
that information we as traders/investors require to make informed decisions
regarding our stock picks. We can do this without the input from the gurus
and the media hypes of the world.
Why would I want to exclude the information provided by these gurus and
these so called financial experts in the media world? Why would I just rely
upon the charts when tomorrow or next week we have important economic
data coming out or company 'A' has earnings coming out and, according to
some, it's too risky to be in the market or in the specific stock? The reason is
simple: The charts contain price action that reflect ALL of the available
information that is out there.
It does not matter that Goldman Sachs is selling stock 'A' or Future 'B'.
Lunacy!, you say. How can you say that when we know Goldman Sachs is
the world's largest investment bank in the world? That, with all that financial
clout it can move ANYTHING it wants ANYWHEREit wants to. It's
because all of that information is contained IN THE CHARTS. It's not the
lack of information that is preventing us from taking/staying in that
position/trade, it's our inability to seek, find and interpret the information
that is already there. It's staring right at us in the charts! This leads us to the
journey we are about to take.
I will start by utilizing the basic parameters of technical analysis. I will
expand them to reveal their basic tenants and how, if we just focus on The 3
Amigos, they will aide us in interpreting what the charts are telling us. At
this time, all I ask of you is two things. First, have an open mind. If you have
dabbled in the financial markets before and those adventures have not been
very fruitful, or you have had some success and are looking to augment your
strategies, try to leave the biases at the front door. Keep an open mind, read
the information contained in here and if a little bit helps you, great! I think
you will find this most beneficial.
So now that we know the chart contains all available information that is out
there, what next? How do I translate what is being presented to me in the
chart so that I can benefit from it? How can I anticipate/forecast the zigs and
zags that stock 'A' or Futures contract 'B' with a high degree of success? That
is where the 3 key elements or the 3 Amigos, as I will refer to them going
forward, come into the picture.
The 3 Amigos are Price Action (includes progression), Levels, and
Momentum (trend). They help propel the markets. Through our
understanding, experience and/or objectivity we can utilize the 3 Amigos to
maximize our rewards. Whether one is an investor or a position player,
holding a stock for a duration of weeks or months, or a scalper holding the
stock for a minute(s), the rules do NOT change when it comes to the 3
Amigos. Utilizing these 3 elements will enhance our understanding of what
is going on, enabling us to make the appropriate decisions/actions that will
enhance our financial well being.
In the next issue we will start to explore the world of the 3 Amigos, utilizing
some charts to aide in the explanation. Until then, take care and happy
trading/investing!
Issue #3/6 – UBER INDICATORS
A Post from my friend Kewltech.....
Another fantastic day in trader chats. I love to read the scintillating
speculations of the uberanalytically incorrect, the far from technical vomit of
some traders. I mean that in a loving way, not in a facetious manner. I love
all that banter, it is the real reason I go, to get a nice laugh. The other reason
is, under all that wonderful, mentally comical regurgitation, lies the
most UBER INDICATOR as spaztik himself would agree. We are talking
about the ultimate, contrarian indicator. Those instances when certain
individuals say some future/stock is a good long, it’s definitely a great short
and vice versa. If one was to document the data, one would find that it has a
fantastic track record. This leads us to our 'friends', the 3 Amigos.
Once you learn how to understand the 3 Amigos as Spaztik will detail, one
can literally mine the chat rooms for gold. The reason for this is that many
traders are not up to par when it comes to reading charts. They don't
understand momentum and/or price action. What they do have is a limited
grasp of what technicals are. These same individuals intertwine a lot of news
and unfounded rationalizations to supplement their limited understanding of
these concepts. Chart reading is an essential skill. If you shortcut this part of
your skill set as a trader, you will severely harm your bottom line. This is not
a lame attempt to warn you, this comes from my own experience.
In order to progress your skills, you must truly understand what your tools
say and do. People are generally lazy. I know I am. You must fight this
tendency in order for you to get a complete understanding of what the charts
are telling you . People excel in trading by understanding the why. Many
people supplement the "why" with meanderings such as its the news, market
manipulation and blowing people's stops . Are these technical in nature?
Hell no! So why mix technical analysis with such musings? You will only
fail to understand how charts work.
Try to be visually sensitive. Learn to identify chart patterns and recognize
they are not always textbook. The uglier the better. Once we cover
progression, you will understand how these patterns develop and how one
can actually visualize them forming BEFORE they come into existence. If
your use oscillators, learn to read your oscillators and incorporate the price
action so it’s visually centric. There is logic and order on how markets move.
If not, forget learning technical analysis.
Always be inquisitive. There are many people who fail to learn from others.
They fail to find all the reasons as to why things are the way they are. Sure,
they will agree that something makes sense, but have they fully internalized
it? One indication that they have not, is when the same thing happens again.
They fail to see and understand why it happened, they don't even recognize
it as a similar occurrence. When queried, they are unable to explain it as it
was presented to them before. Understand exactly the 'why', if not in your
teachers words then in your own.
It is infinitely hard to teach something to people who fail to understand the
basics. The core concepts. There was this "informed" trader, offering to
teach someone the wealth of his knowledge. He was asked about what he
thought the market outlook would be. He then offered his point of view from
the monthly and then the weekly. Then completely contradicted himself by
saying that longer term trends are non-existent and that only the short term
trend is valid. Their core concept of trend was inaccurate. It is these kinds of
mental midget issues that you as an aspiring technical trader must sort
through and avoid. Many traders are a wealth of contradictions, satisfied
with “it works till it doesn't.” It is like expecting satisfactory results in two
weeks to accomplish an absolutely impossible task. Is setting yourself up to
fail the best way to win? But that is exactly what many traders do when they
contradict core concepts. There are just a few major core concepts. Trend,
Support, Resistance, Accumulation, Distribution
These are basics you will need. You won't be able to understand progression
if you don't understand these. You wont be able to understand legs and
absolutely the concept of 1st touch and 2nd touch. You can't build a tall
building if your foundation is liquid or gas. Common sense is actually the
least common trait one will find amongst traders. I love this "guru" who sells
his method, then claims the technicals failed because of market
manipulation. The technicals didn't fail, he failed to read it.
Good Luck!
Kewltech
Issue #4/6 – The First Amigo: Levels &
Legs Part 1
The first exposure to a chart can be a very intimidating experience. At first
glance, a chart looks like a bunch of candles/bars or line meandering up and
down over a specified period of time. How do we make heads or tails out of
it all? How should we read what is right in front of our eyes?
The first step is to think of the chart as a map. The more area covered by the
map the more significant is the map. Hence, just like a map, for a market,
your bigger area covered would be on the longer time frame. So for that
reason, the more significant information is contained on the longer time
frames. Thus, the levels of greater significance are found on the longer time
frames. Now to the next part: What information should I be paying attention
to and how do I find it?
The basic premise of what a chart is showing by its movements, is the
gravitation towards areas where support is either lost or gained. This is
evident on EVERY time frame/tick chart and this is where we will find our
levels. These movements, which some refer to as trends, are what I refer to
as legs. Those legs found on the longer time frames, indicate the more
significant levels of support lost or gained and hence the more significant
legs. Last but not least, as a rule of thumb, a strong level of support lost or
gained is usually highlighted by the presence of numerous candles/bars. One
can see this on a variety of different time frames or tick charts.
These legs can be numerous on one time frame or tick chart, involving many
candles/bars, and at the same time, it could equate to just ONE leg,
containing a few candles/bars, or even just ONE candle/bar on a
higher/longer time frame and/or tick chart. This last element can be utilized
very effectively to enhance one's profits, using the shorter time frames' legs
to make numerous plays within the larger leg(s) of the longer time frame(s).
This leads to the next point to be covered.
So which leg(s) should I be paying attention to?? In the context of dealing
with the present price action, one should be focused on the current leg we
are traveling in and at the same time keeping an eye on the leg we are
retracing. The last part of the equation is seeing how these two legs fit
within the bigger picture, your bigger leg if u will. The bigger leg will have
the greater degree of influence on all of this. This will be affected, in some
degree, by the momentum and progression that the price action is involved
with.
So back to support lost or gained, what about it? How is this demonstrated
on a chart? Let's start off with a down move first. The initiation of a down
move first requires what you last gained to be lost. This can be reflected
by a single candle's/bar's high or an area containing many candles/bars. Once
this level of support is lost, price will want to migrate towards the next lower
level of support gained. In other words, the last area/level that was cleared to
obtain the current level on the chart in question.
In the case of an up move, the opposite is true to initiate the move. The last
level of support lost must be gained, in order to move to the next higher
level of support lost. Now in the case of an up move, this can be reflected
by a single candle's/bar's low or an area containing many candles/bars. This
concept of support is a visual representation of the market as it pertains to
the supply and demand of the item in question, i.e. the
stock/future/forex pair.
In conclusion, these useful tidbits allow the multitude of different market
participants to benefit from the numerous 'profitunities' that are presented.
This allows us to scoff at the ignorant musings of those traders who make
comments such as, 'we have not had a pullback during this up move'. I'm
sorry, what chart are you looking at because I can see the pullback on the Es
for example from 1304 to 1293, and again from 1317.5 to 1312.25, etc.
Their lack of understanding of where to look for a retracement and how far it
will pullback to, denies them the maximization of their profits. In the next
part, we will look at a few charts to better demonstrate the elements covered
in this blog entry.
Until then, happy trading and follow them legs!!!
Issue #5/6 – Levels & Legs Part 2
In this issue, we will look at the process of determining levels of significance
that construct the legs and then we will gloss over the process of how
momentum and progression comes into the equation. Momentum and
progression will be explored in more detail further along in our subsequent
discussions but its minimal mention is required at this time. Let's now
explore the thought process of how we want to proceed when looking at a
chart and finding the information it is providing us.
The first step is to always start from your longer time frames. Here, one is
able to get a proper perspective of the overall shape of the price action of the
instrument in question and where exactly does the current price action fit
within that broader scope. In addition, the longer time frame always takes
precedent in all aspects concerning the 3 Amigos. Thus, with the elements of
momentum and price progression, it allows the trader/investor to make
decisions which are technically sound and monetarily advantageous. Let's
start by looking at a chart and observe how we determine where these levels
can be found.
On the chart above, we have the monthly time frame for GS. You will note
that there are 2 distinct, significant legs, one going up (green arrow) and the
other heading down (red arrow) on this time frame. For the purposes of
clarity, only significant levels on this particular time have been noted, as
highlighted by the turquoise, horizontal lines. One could draw additional
lines on the smaller time frames, i.e. the weekly, daily and/or 120min etc., to
provide more specificity to suit one's trading or investing parameters and to
minimize one's risk. In that context, these legs traveling from one turquoise
line to another are segmented into smaller legs that make up those larger
legs. Obviously, one could end up with a Sethmodonianmasterpiece of illwanted repute (many, many lines) but you get the picture regarding the
possibilities for the investor, short/long term swing trader and scalper.
One of the easier ways, to denote a level of significance is to look for an area
of congestion, an area where an abundance of candles or bars are present.
This action highlights a level of importance is being respected. The next step
is to look for the candle(s) in the congestion that signified the end of the
prior move LEADING into the start of the construction of the congestion
area. This candle(s) will signify your level of significant support gained or
lost which initiated the last leg up or down. Let's look a little closer at the GS
monthly chart provided.
If we direct our attention to the move up from the 2008 lows, you will note
the significant leg as highlighted by the red arrow that led to that low. On the
move to that low, within that leg down from 2007, levels of
support gained by the move up, signified by the green arrow, were lost.
While in the move signified by the red arrow, those levels of
support gained by the move of the green arrow, serve as spots where
retracements will occur. Using the knowledge of where the legs on a smaller
scale start and end, allows us to know where to look and expect a
retracement to occur and where those retracements will end. We can, if so
desired, take advantage monetarily of this knowledge by playing the counter
move and at the same time know the limitations of the counter move. In this
example, we use the current leg down as our guide. In a nutshell, when we
are in any move on any time frame, our main focus should always be the
current move we are in with an eye on the prior move to the left we are
retracing and then how does it fit within the broader picture.
One thing to note and remember, when looking at a longer time frame like
the chart here in this example. A wide range bar also serves as a leg in itself
as they are composed, on a smaller time frame, of many bars and thus gives
the trader another point of reference to profit from. Giving the short term
swing trader profitunities that can be quite fruitful, in this example,
anywhere from 10 -50 points. This simple fact further illustrates the power
of the leg concept. In essence, what we have are legs within legs, providing
traders/investors in the know with numerous opportunities. Let's look at
another leg scenario on the GS monthly chart.
If you direct your attention to 2008, you will see a leg up from March 2008
to the high of the red candle of May 2008. If we look left of this area,
starting from 2006 to the time period in question, we will see a multitude of
candles' open, close, highs and lows here. This aides in enhancing our
understanding of the significance of this area. The directing of our attention
to the April/May 2008 time period specifically, aides in narrowing our focus
so we are then able to specify the level of support lost to start the next leg
down. In essence, this is the leg immediate to our left that GS is retracing
within the larger leg signified by the red arrow. We can then make the
appropriate decisions pertaining to either entering (going short) or exiting a
trade (if long) or even reversing a trade/investment. Now the basic premise
of legs aides in making this process elementary and at the same time more
precise. Augmented by the other 2 Amigos, Price progression and
Momentum, gives the trader/investor the necessary information to make
technically and financially sound decisions.
Now why would one expect selling at the area in question?? The answer is
simple besides what which has been stated above. This is where momentum
and price progression enter the picture. The momentum of the move from
the 2007 highs is still down. GS was approaching this significant level of
support lost, for the first time in the current move from the 2008 lows.The
move from the 2008 lows is part of the price progression to turn that
momentum.Since the main focus now is how do we find our levels/legs of
significance, we'll just briefly touch upon this last concept.
Price progression involves 2 aspects: How a market moves in respect of
levels of support lost and gained, and secondly, in doing so, how it turns or
slows the momentum of the prior move of not just the current time frame but
also of the longer time frames. Generally as a rule, the longer the time frame
that has the strong momentum move, the longer it takes for the shorter time
frames to go through the progression phases to turn that momentum of the
longer time frame. As a result of this, the weight of the longer time frame's
momentum will bear itself on the shorter time frame when it moves counter
to it until those levels where your bigger legs started and ended are reached
on the longer time frames.
So what exactly do we see and where on our charts?? First off, we would see
this price progression in greater detail by looking at our shorter time frames.
That is where we would start to see the action that will impact the
momentum of the move on the longer time frame before it hits the level of
significance on the longer time frame. Looking at GS, what we would see is
the following. Due to the move from the 2008 lows, which on an
intermediate term basis has created bullish momentum, we would see back
and forth action on the shorter time frames, what some traders and gurus
commonly refer to as 'chop'. The 'chop' is the shorter time frame's way of
reverting back to the momentum of the longer time frame in this particular
instance.
At the same time that the shorter time frames are doing this, the move on the
intermediate term prior to this 'chop' is impacting the momentum of the
Longer time frames, i.e. the monthly and weekly. In this manner, the time
frames are working together; maintaining the momentum of the longer time
frame while when levels of significance of the longer time frame are
approached, the shorter time frames actions , i.e. 'chop', kicks in to slow/turn
the momentum so they are respected. Throw in elements of levels and other
points to consider regarding price progression and momentum which will be
covered in subsequent issues, then the guessing of what something will do
are reduced immensely.
This is how markets work, how they create liquidity, how it creates buyers to
sell to and sellers to buy from. I will explain the precise movements in
subsequent issues. Suffice to say, in our current example, that the 'chop' is a
result of price progressing in line with the levels of S lost and gained on the
shorter time frames' last leg up, within the bigger leg in question from May
2008 to the lows of 2008.
The lack of understanding of this basic premise stated above, is too often too
easily dismissed as being just 'chop'. One can observe the ignorance and
stupidity expressed by the comments made in various trading forums, where
every excuse for why some financial instrument moved in a certain manner,
contrary to what they expected is provided. Even some so called technical
gurus, who charge exorbitant prices for a variety of different products
from dvds, depicting these magical indicators to chat rooms and/or trading
services, fall into this vacuum of uselessness. They then try to mask their
deficiencies by saying that the technicals did not work. No, sorry the
technicals did work, you just failed to read or understand them properly.
Like stated above earlier, I will go into greater detail as to how and what to
look for regarding price progression and how it manifests itself in
momentum. For your amusement, here are some observed comments
highlighting some of the nonsense out there...
Trader 1: I think you have to see what you trade more deeply than just
trading vehicles
Trader 2: There are 1000 things can affect the price, there is still no logic
even with the news i guess
Trader 1: I think there is.... but obviously is not evident.....but there is, much
logic, i simplified everything to almost to nothing
Trader 2: For me it just a metal pacient, for me it does whatever it wants
when it wants especially if it goes against you
and some more pearls of wisdom...
Trader 3: Hard to rely on technicals with so much volatility with
fundamentals
Trader4 : Well, I see we had a weak rise. Looks like a forced rise. those
rascles.
Does any of this make sense or even technically relevant? People who call
themselves “traders” but really have no clue how to read a chart, and thus
look for excuses due to their technical shortcomings. Remember – JUST
follow da charts, after all it’s MAGIC!
Issue #6/6 – Levels & Legs Part 3
There appears to be some confusion based on the comments I have received
on what actually constitutes a leg. Let me clarify, a leg is a move/trend that
originates from where a level of Support was LOST or GAINED. We want
to pay particular attention to that which is UNTESTED WITHIN the move
that is being retraced NOW. This applies across ALL TIME
FRAMES. GENERALLY, as a rule, these are found where one finds
Highs, Lows and/or congestion. What a High Lost, a Low gained, and lost/
gained from congestion to initiate the move from it is of importance. This
element has been addressed earlier in the blog. The key point being that IT’S
UNTESTED IN THE MOVE BEING RETRACED NOW! This applies
for ALL TIME FRAMES!!!
Fitting the move being retraced NOW from a significant high, low or
congestion area, and the move you are currently in NOW, with the move to
its IMMEDIATE LEFT FIRST, leads us to our next phase of our analysis.
That is, we can then ascertain the significance of the move to
the IMMEDIATE LEFT. We do so by looking at WHETHER IT IS THE
MOVE (leg/trend) THAT GAVE OUR SIGNIFICANT HIGH OR
LOW, or is it simply a level of support GAINED UNTESTED that is being
respected, causing a low to be established, or a level of support LOST
UNTESTED causing a high to be established. If the answer is
a NEGATIVE to the first part of the last statement, we would then look TO
FIT IT WITH THE LEFT, TO THE MOVE THAT DID. The move to
the immediate left usefulness is not mitigated by this conclusion. The mere
fact that a move occurred to the immediate left leads us to understand that a
level of Support lost/gained, UNTESTED, was hit causing the resulting
reaction, and by doing so it has generated bullish or bearish momentum.
Based on the subsequent move from that level of support lost/gained that
was UNTESTED, and by the move to the immediate left, information has
been provided. We are able to ASSESS ITS IMPACT on the momentum of
the move that took us to that spot we are getting the reaction from on that
time frame. THIS CAN BE APPLIED TO ALL TIME FRAMES. Thus,
change happens on our lower time frames FIRST to the CURRENT
MOVE'S momentum. The higher the time frame, the more significant it
is! We can then take that information to assess its impact on the next higher
time frame(s) trend and its momentum. This is where our bigger legs/trends
are found.
Taking it one step further, we are also able to assess its relation to the TRUE
TREND, the impact on its momentum and where we are in
that TREND/LEG, ergo where we are in the progression aspect of that
trend/leg. Where we are in relation to a level of support
lost/gained UNTESTED in the trend/leg. In short, to the move that gave our
significant high or low and to the move that gave OUR MOST RECENT
LOW OR HIGH and how it fits with the former! We can extrapolate
this PROCESS/ANALYSIS to our lower time frame(s) as well. This
process occurs ON ALL TIME FRAMES, the lower the time frame, the
more frequent it occurs. Thus, why we see more legs/moves/trends, the
lower the time frame we are observing. This is very beneficial in a multitude
of ways to the scalper, day trader, swing trader, position trade, and/or
investor! So I'll let you think of the possibilities that are there.
Secondly, based on the fact that it hit significant support lost/gained, the
market will aim to target the opposite, i.e. significant support lost to
significant support gained and vice versa of the higher time
frame(s). IF there exists BETWEEN THOSE 2 PTS, levels of s lost or
gained, UNTESTED, they will be respected, especially if that CURRENT
MOVE IS IN THE SAME DIRECTION OF THE INTERMEDIATE
TERM MOVE and/or LONGER TERM MOVE. This will cause a test of
the opposite that is UNTESTED.
Hopefully, this has stirred some thinking on your part in regards to the
profitunities that are possible.
Table Of Contents
Module 1 Building Foundations
Unit 1 Chart Reading: Why Is It Important?
Unit 2 Embrace The Suffering
Unit 3 Introduction To Cycles & Phases
Unit 4 What Is Accumulation
Unit 5 What Is Distribution?
Unit 6 Introduction To Momentum
Unit 7 Consolidation
Unit 8 Chart Patterns, What Are They?
Unit 9 Wedges
Unit 10 Trend & Trend Lines
Unit 11 Classical Support & Resistance
Unit 12 Chasing The News
Unit 13 Indicator Trading
Unit 14 Divergences
Unit 15 Utilizing MACD
Unit 16 An Introduction To Trend
Unit 17 Trend Starts
Unit 18 Gaining & Losing Support
Module 2 Trading Meta
Unit 1 Support Gained, Support Lost In Depth
Unit 2 Failing To Gain Support
Unit 3 Failing To Lose Support
Unit 4 Gaining & Losing Support In-Depth: Peaks & Valleys
Unit 5 Points Of Invalidation & Stop Losses
Unit 6 Losing The High
Unit 7 Gaining The Low
Unit 8 Trading Accumulation & Distribution
Unit 9 The 8/30 MA Cross
Unit 10 Fibonacci Retracements
Unit 11 Fibonacci Extensions
Unit 12 Parabolic Price Action
Module 3 Price Action & Trend Analysis
Unit 1 Trend & Common Sense
Unit 2 Deconstructing The Trend
Unit 3 Smaller Time Frame Trends
Unit 4 Price Action & Momentum
Unit 5 Trend Confusion
Unit 6 Reversal Vs. Retracement
Unit 7 Volume Climax
Unit 8 False Breaks, Fake Outs, & Traps
Unit 9 Trend Continuation
Module 4 Market Psychology & Risk
Unit 1 Forming A Bias
Unit 2 Common Mistakes & Bad Habits
Unit 3 Position Scaling & Campaigning
Unit 4 Ego & Pain Trading
Module 1 Building Foundations
Unit 1/18 Chart Reading: Why Is
It Important?
Introduction
This course is a summary of Kewltech's Blog. I originally charged for
it, but since I took most of the details from Kewltech's blog which
prohibits commercial uses I decided to give credit where credit is due.
This course is a summary of Kewltech's blog the way I understand it,
and I hope it helps you.
As I began my trading journey, I found myself obsessed with the idea
of trading stocks. Just as many before me, I began researching
anything I could find on day trading. I was staring into an abyss. An
endless sea of chat rooms, forums, books, and market jargon awaited
me as I dipped my toes. I went in with no life jacket, fully submerged
and drowning. I loaded my charting platform, added a few shiny
indicators, and placed my first trades. 12 profitable trades later, I had
managed to build a $2,000 account into about $4,000 attempting to
trade what I thought were ‘channels’. It was May 2010. I entered my
thirteenth trade: long a casino stock: LVS. If you know what
happened in May of 2010, you already know where this is going. The
market collapsed for the largest down day in recent history, dubbed
the “Flash Crash”. I lost all of my profits. I was so intimidated by this
event, I decided if markets were that volatile, I was probably not
suited for trading. I didn’t place another trade for another two years.
In the course of the following few years, I proceeded to lose money
just like every other trader ‘cutting teeth’. I endured some of the most
brutally painful and expensive lessons imaginable. I nearly gave up
trading indefinitely many times after learning many hard lessons. The
market is patient. It waits for you to wade peacefully out of the
shallows, luring you into deeper waters. If you let it, in a few short
moments, that depth submerges you into a lifeless spiral of misery,
revealing the true nature of your most inner self.
Years later, during a span of approximately one week, I had turned
$2,000 into over $20,000 trading the EUR/USD.
Feeling more confident, I got highly over leveraged and absent of a
stop loss, I returned to my desk after taking lunch, 45 minutes later,
holding a position in the red to the tune of about $30,000. I believe
most people fail at trading due to a lack of discipline, dedication,
willpower, and most importantly: lacking chart reading skills. Chart
reading is simply the ability to understand the seemingly random
movements of market price action.
A lot has changed since then. I’ve spent many years studying and
dissecting charts. Eventually, Kewltech began showing me
techniques and methods that later evolved into an understanding of
the logical progression of price action. This guide is literally a
compendium of everything I know about chart reading as I know from
Kewltech. Likely, you found this lecture by word of mouth. Whatever
led you down this path, I hope it found you well, and financially intact.
DISCLAIMER: Module 1 is probably the most difficult to comprehend,
but it illustrates all of the core concepts you will need to learn to
progress and advance your chart reading. Read Carefully.
Unit 2/18 Embrace The Suffering
This lesson will probably seem some what out of place, and
counterproductive to what most traders and motivational speakers
teach. I imagine before finding this lesson, you’ve read the musings
of trader gurus promising to teach you how to turn a small amount of
money into a large amount of money. While I believe some of them
could do that, they don’t give it to you straight. They don’t implicitly
tell you about the suffering required to become a successful trader.
They don’t tell you about the long hours of chart study. They love to
tell you about how they can help you avoid making mistakes. I say,
you’re almost certainly going to blow out your account, probably more
than once. Mistakes are necessary. You must make them to have true
understandings of consequences. If you believe that by reading these
lessons, you will avoid making mistakes, I must tell you that you’ve
been misled.
Suffering: the state of undergoing pain, distress, or hardship.
Ever wonder why you rarely hear trading gurus talk about the
suffering endured when learning to trade? It’s because it’s much
easier to sell the idea of success than the idea of suffering. The
problem is, success can’t exist without suffering, just like fast can’t
exist without slow, just like hot can’t exist without cold, just like dark
can’t exist without light. I’m telling you, you must suffer to become a
successful trader.
The price of discipline is always less than the pain of regret. — Nido
Qubein
Accepting loss is part of the game. It’s one of the most troubling
aspects of the game. Taking a loss is counter-intuitive. You’ve been
trained your entire life while in grade school to make the highest
grade, and shunned when your scores are low. If you brought a home
failing grade in school, what did your parents do? Did they punish
you?
The problem with trading is that the score is kept by way of profits
earned. Profits earned directly correlates and provides opportunity to
live certain lifestyles. It takes money to buy food and other
necessities. Now when I tell you that you could spend years losing
money before you achieve the ranks of success and become a
profitable trader, are you mentally prepared to deal with that stress?
Losses are a certainty in this game. Losses are suffering. You must
embrace the suffering.
You’re also going to suffer because trading requires you do things
you don’t want to normally do. Trading requires effort and the
persistence of study to attain knowledge. If you lack the discipline to
study and persistence to learn, you may as well spend your time
doing something else.
Success is not the same thing as happiness, just as motivation is not
the same thing as discipline, but a lot of people can’t make that
distinction.
This is the typical nonsense fake trading gurus like to tell you. This
guy is telling you that success requires increased motivation.
Motivation is a lie. Motivation is backed by the presence of feelings.
The problem is feelings only exist in your head. Feelings are not
real. They all tell you about what success requires… learning,
training, practice, motivation, vision, hard work, etc. Lies. Why don’t
they tell you about the suffering? Why don’t they tell you about the
discipline? Probably because those things are difficult, and especially
difficult to sell.
Maybe you still don’t fully grasp the difficulty of the journey from which
you are about to embark. If you’re still in your youth, you have a
better chance in becoming a Navy SEAL.
The odds of you completing SEAL training are not favorable: 1 in 4
(25%). Each year, about 1,000 recruits make it to SEAL training.
About 250 complete their training and join approximately 2,000 more
active SEALs. I keep hearing about how 90-95% of traders fail. That
really means they fail to become profitable. But why? Because they
fail to embrace the suffering. They never develop the discipline to
become successful. The thing about trading not shared by
other professions is there is no predetermined length or amount of
suffering required to become successful. It’s different for everyone.
Unit 3/18 Introduction To Cycles
& Phases
Luckily, prolific traders well before my time observed and attempted to
explain market progression. Three men stand out above all others:
Charles Dow, Ralph Elliott, and Richard Wyckoff. These men lived
through the early 1900s and had successful careers. They all
approached their analysis from a psychological perspective of supply
and demand. While, Wyckoff, Dow Theory teach that markets move
in three distinct cycles or phases, Elliott wave principle suggests that
markets move in wave patterns. These three men paved the way for
modern technical analysis.
Dow Theory asserts that major market trends are composed of three
phases: an accumulation phase, a trending phase, and a distribution
phase. The accumulation phase (phase 1) is a period when investors
“in the know” are actively buying (selling) stock against the general
opinion of the market. During this phase, the stock price does not
change much because these investors are in the minority absorbing
(releasing) stock that the market at large is supplying (demanding).
Eventually, the market catches on to these astute investors and a
rapid price change occurs (phase 2), creating trend. This phase
continues until rampant speculation occurs. At this point, the astute
investors begin to distribute their holdings to the market (phase 3).
Psychological Progression Cycles (Side Left)
I stole these illustrations becauseWyckoff andDow Theoryare
relatively well known,and the
above assertion clearly illustrates the psychological
l perspective of each phase. I suppose these models are useful, but
they do not approach the market phases from any sort of quantifiable
view. If I opened a chart and began to place a trade, would I really
find it useful to subjectively annotate various emotions, in an attempt
to explain the price action? At what point would I decide price
psychologically moved from pessimism to panic?
It’s much easier to keep the market limited to three phases outlined in
general Dow Theory. Occam’s razor summarizes that generally the
simplest explanation is usually better. The main take away from this
lesson is that markets progress in three distinct phases or cycles,
which ultimately form and complete market trends. In my trading, I
use the simplified cycle illustration found on side right.
Simplified Progression Cycles (Side Right)
Unit 4/18 What Is
Accumulation?
Moving forward with the idea of market phases, the first concept
necessary to discuss is the accumulation phase.
Accumulation : The act of buying more shares of a security without
causing the price to increase significantly. After a decline, a stock
may start to base and trade sideways for an extended period. While
this base builds, well-informed traders and investors may seek to
establish or increase existing long positions. In that case, the stock is
said to have come under accumulation.
All upward moves in price cannot take place unless accumulation has
first occurred. The process can occur quickly, or it can be lengthy and
drawn out.
When is accumulation seen? After a decline.
What does accumulation look like?
You should see the candles start to base and trade sideways.
The chart above illustrates the accumulation process. Price trended
downward and began to trade sideways, forming a base.
Why does accumulation occur? Remember I said I approach these
concepts from a physics standpoint. If price has trended downward,
it must first offset bearish momentum, before reversing and trending
higher. The same logic applies to driving a car and pressing the brake
pedal. Does the car instantly come to a stop before changing
direction? No. From a supply and demand perspective, accumulation
= demand. I believe accumulation zones are simply price areas of
interest used by large trading institutions to enter and exit positions.
In terms of trade volume, bearish positions or bearish volume is being
offset by buyers entering new positions, and bullish volume created
by traders covering short positions.
What should we expect to see after the accumulation phase? A move
upward, or a rally.
Does a rally always occur after the accumulation phase?
No. The accumulation process can fail to offset bearish volume. I
believe this occurs because momentum was not exhausted. The
car’s brakes weren’t pressed hard and long enough. Thus, trend was
not exhausted.
Accumulation occurs on all time frames, but is always seen on
smaller time frames first. Why is accumulation seen on smaller time
frames first? Simple. Which takes longer to form, a five minute
candle or a 30 minute candle? Obviously, 30 minute candle.
From left to right the exact same chart is displayed on a five minute
and a 60 minute chart. Which chart is accumulation more easily
discerned, the left side or the right side? The (right side) 60 minute
chart only shows one or two candles that appear to form a base after
a move down, but the (left side) five minute chart more clearly
illustrates an easily identifiable base.
If you’ve spent any length of time studying markets, listening to gurus
and other traders, you may have heard them say something to the
effect of, “The market is sideways. It’s trying to make up it’s mind.
Gonna wait for confirmation.” This is simply flawed logic, or worse, a
lack of any logic.
If price wants to trend upward, it must first accumulate. Following a
decline in price, basing occurs to offset bearish momentum, which
prepares a price reversal to trend higher. This is a core concept in
how I trade, and must be thoroughly understood to grasp future
concepts.
Unit 5/18 What Is Distribution?
Complementary to accumulation, distribution is the market phase
which occurs before a downtrend or a reversal occurs.
Distribution: The systematic selling of a security without significantly
affecting the price. After an advance, a stock may start forming a top
and trade sideways for an extended period. While this top forms, a
security’s shares may experience distribution as well-informed traders
or investors seek to unload positions. A quiet distribution period is
usually subtle and not enough to put downward pressure on the price.
More aggressive distribution will likely put downward pressure on
prices.
Distribution is the opposite of accumulation. If the market is going to
move downward, it must first utilize the distribution process to offset
previously generated bullish momentum.
Revisiting the car analogy: distribution is simply pressing the brake
pedal and slowing down before shifting to reverse. Think about it…
distributing or dispersing bullish volume/momentum.
As the definition says, “After an advance, a stock may start forming a
top and trade sideways…”
When do distribution processes occur? After an advance, or move
upward.
What will you see? A topping pattern and sideways trading action.
What will you expect to see after distribution? A move downward.
Just like during the accumulation process, distribution will also
become recognizable on the smaller time frames first.
Seen above, I’ve included the same exact chart, but compared two
different significantly different time frames. On the left is the Weekly,
and on the right is the 4 hour chart. Focusing attention on the Weekly
chart (Left), the sideways distribution pattern highlighted in the blue
box is only seen as a formation of five or six candles. On the 4H chart
(Right), the sideways pattern is seen more clearly. Momentum is
more clearly seen slowing, preparing for the reversal…pumping the
brakes. What will you expect to see after distribution? A move
downward.
Did I mention distribution occurs on all time frames? Yes, the cycles
are clearly visible even on a Monthly GBPUSD chart.
Would it be possible to predict really large trends in markets? If only
we had something to help us understand what the charts are setting
up to do, could we have shorted the US Dotcom and Housing
bubbles of ’00 and ’08? This chart also exemplifies the idea that
distribution can fail. If it does fail, a move down or a reversal does not
occur.
THE TAKEAWAY: Distribution occurs after a trend higher, and begins
to form a sideways topping pattern, before reversing and trending
back down.
Unit 6/18 Introduction To
Momentum
Understanding momentum is an important concept to grasp for
trading. Being on the wrong side of a direction trade often happens
because the trader lacks understanding of the market’s momentum.
Short term counter-trend scalps would be an exception.
Momentum: strength or force gained by motion or through the
development of events.
As you’ve already learned, accumulation and distribution are the
primary mechanisms of moving the market up or down.
In grade school, you studied physics in class, and specifically learned
about kinetic and potential energy. There’s an old market axiom, “the
wider the base, the larger the space,” and it applies to both rallies and
corrections. It also describes a sideways market, where stored
energy is released, resulting in a large price movement.
Accumulation and distribution.
Consolidation is easily one of the most discussed topics amongst
traders. Inexperienced traders usually like to talk about how the
market is trying to decide what to do. It’s always waiting on a news
event, or some other political event. But I know consolidation is just
simply a pattern; typically a wedge.
“Begins to top or trade sideways.”
“Begins to base or trade sideways”
As I’ve hinted before, the market has already decided. What is this
idea of the market waiting? It’s important to view multiple timeframes
to examine relative trends. If you observe consolidation, rotate to the
next larger time frame, until you find clarity of trend. It’s important that
you do no not only trade on one chart, or only a single time frame.
How would it be possible to understand what price is going to do in
the future without first understanding what it is currently doing? Let
that sink in for a moment. Using multiple time frames will provide
insight to the chart’s immediate situation, the intermediate outlook,
and the long term outlook…Understand the bigger outlook.
Traders use their charts to gain understanding. They don’t just look
at a chart to make a guess about where price might go. Is price in
an accumulation or distribution pattern? Ask yourself, “where is the
current price action with relation to the longer term trends? How is
price reacting to more significant levels? How significant are nearby
levels?” I’ve said it before…chart patterns form on all time frames,
and to recognize multiple time frame patterns, you must analyze
multiple time frames. Seems like commons sense, but you’d be
surprised how many traders never look at anything above an hourly
chart.
To understand momentum, understand what caused it.
Unit 7/18 Consolidation
“Guys, it’s consolidating. I’m gonna wait until it decides to make up
its mind.” This is a fairly common thought among many
inexperienced traders. The real problem with this line of thinking is
that it’s incredibly inaccurate. How can you even make an actionable
assessment with the idea that consolidation suggests that the market
is trying to decide what to do? Sit in a chat room and listen to this
illogical thinking. What does it ultimately create? Paralysis. Traders
become paralyzed because they can’t read the chart, and must
constantly wait for confirmation. What is this awaited confirmation?
Price direction. Moving forward, my suggestion is to stop using the
term consolidation and replace it with a more actionable word:
accumulation or distribution.
If there is information to ascertain from “consolidation”, then you must
first answer one of two questions. Is it accumulating? Is it
distributing?
Uninformed traders love to “wait for the market to decide”, and when
the market does “finally decide”, their analysis is always late.
Consolidation is not the process of the market attempting to decide
what to do.
Notice, each example of consolidation highlighted in the blue boxes.
The boxes indicate sites of accumulation or distribution. The
momentum was already indicating the direction the market would
move prior to when the “market decided” to move. What was the
result of each accumulation or distribution?
Unit 8/18 Chart Patterns, What
Are They?
Why am I wasting time addressing patterns? When I was starting
out, I eventually found chart patterns, but it wasn’t until much later
that I understood how they form, why they form, and what they really
represent. For the moment, it’s worth addressing patterns to
establish a foundation, and then review them later for trading
applications.
Below, I’ve provided a list of basic chart patterns. If you’ve done any
research, like me, you’ve probably found a ton of pattern
configurations, specific probabilities of success and failure, and a ton
of other over complicated stuff to go along with them. Well, guess
what…no matter what the pattern is called, it will fall into one of two
categories. I bet you can guess which two, because you just finished
reading about them.
All patterns are a representation of either the
ACCUMULATION or DISTRIBUTION process.
Below, I drew a couple of triangle patterns and a head and shoulders
that formed on the 60 minute EURUSD chart. A lot of traders talk
about patterns and memorize all of them. Sometimes simple triangle
or wedge patterns form more complicated patterns like Head &
Shoulders patterns. I really only look at wedge patterns, commonly
called ‘triangles or pennants’ and recognize them for what they are:
accumulation or distribution.
Basic chart patterns are essentially some form of bullish/bearish
wedges. The more complex patterns are double tops, double
bottoms, head and shoulders and inverse head and shoulders etc.
Every pattern has a probability for success and failure that can
be deduced through proper analysis. Remember how I mentioned
that accumulation/distribution can result in a failure? If you dwell on
the probabilities or use them as the basis for a trade then, you’ve
completely missed the point.
“Hey guys, it looks like it’s forming a double bottom. That’s bullish
right? But the probabilities of success in this market environment
aren’t good enough…”
Can you spot the flawed logic here? It has nothing to do with the
pattern. The problem pertains to their lack of understanding the how
and why the pattern formed. As a new trader, recognize that there’s
absolutely nothing wrong with studying chart patterns, as long as you
recognize them what they really are: accumulation/distribution.
Because in knowing the how and why, knowledge and understanding
is truly gained. Being able to recognizing a pattern does very little by
itself. You have to understand the underlying reason as to why that
pattern is forming. This understanding provides you with the ability to
anticipate larger moves within the market. It also allows you to take
safer entries and exits. Logically, if you spot an accumulation pattern
is forming, it might be ill advised to look for short entries.
Of the two defined processes, which does a double bottom pattern
best fit? Accumulation or Distribution? If it’s not immediately and
logically apparent, work it out step by step. A double BOTTOM…
insinuates what?… A bottom. What is another word for a bottom?…
A base. So which process forms a base? Refer to previous lessons
“What does accumulation look like? You should see the candles start
to base and trade sideways.” So back to the original question…The
answer is what?
Accumulation, Duh…
Wedges and Triangles Within the Accumulation/Distribution Process.
All chart patterns fall into either the Accumulation or Distribution
process. Patterns are useful trading mechanisms if you understand
how they form to change momentum during a trend.
Unit 9/18 Wedges
I use basic chart patterns, because I like simple. The basis for almost
every complex chart pattern is the wedge, or triangle if you’re a
geometry snob. There are two basic types of wedges: the Rising
(Bear) Wedge and the Falling (Bull) Wedge. A quick internet search
provides a picture and definition.
Rising Wedge: The rising wedge is a bearish pattern that begins
wide at the bottom and contracts as prices move higher and the
trading range narrows. If a Rising Wedge occurs after a downtrend, it
emerges as a continuation pattern. As a reversal pattern, the rising
wedge will slope up and with the prevailing trend. Regardless of the
type (reversal or continuation), rising wedges are bearish.
“Price is moving higher, but it’s a bearish pattern?”
The name describes the outcome. An uptrend has to distribute its
bullish momentum before it can reverse. Pumping the brakes,
remember? You already forgot that I said all patterns are the result of
the accumulation and distribution process, and you also forgot that I
said price must first accumulate before it can rally, and distribute
before it can fall? So what does that make a rising wedge? It’s a
distribution pattern.
Here’s an example of a Rising Wedge (Reversal) pattern, that
includes the expected result.
Below is an example of a Rising Wedge (Continuation) pattern, that
includes the expected result.
Falling Wedge: A bullish pattern that begins wide at the top and
contracts as prices move lower. . This price action forms a cone
that slopes down as the reaction highs and reaction lows converge.
The falling wedge can also fit into the continuation category. As a
continuation pattern, the falling wedge will still slope down, but will
occur after an uptrend. As a reversal pattern, the falling wedge slopes
down and with the prevailing trend.
Here’s an example of a Falling Wedge (Reversal) pattern, that
includes the expected result.
Below is an example of a Falling Wedge (Continuation) pattern, that
includes the expected result.
Another Wedge Example:
Unit 10/18 Trend & Trend Lines
If you’ve done any trading research you’ve probably found some
explanations of trend and trend lines. I had to build a foundation, and
much of the information required to build a trading foundation is well
known and well sourced, but often misquoted.
What is a trend?
The direction of prices.
Trend: Refers to the direction of prices. Rising peaks and troughs
constitute an uptrend; falling peaks and troughs constitute a
downtrend. A trading range is characterized by horizontal peaks and
troughs.
Price is ALWAYS trending. Price trends in three directions: Upward,
Downward, or Sideways (no direction). Trend is also relative to
length of time.
The major or the macro trend is the larger overall trend. Inside of the
major trend, exists an intermediate trend, where price will oscillate up
and down inside the major trend without technically breaking it.
Inside the intermediate trend, exists a minor or micro trend that does
the same thing. Explained another way, varied time frame lengths
provide a view of either the Macro, Intermediate, or Minor trends.
Legs within legs…trends within trends.
I use these time frames as a rule of thumb. Less than 1H, & tick
charts. Use 1w, 1d, 4h, 1h, and under an hour.
It’s possible to see a major trend on smaller time frames while shifting
to other time frames. I struggled to use time frames together. It’s
exceptionally easy to shift to a smaller time frame, watch price fall,
and think trend was lost or broken. Only then to shift back to a higher
time frame and realize trend is still intact. It’s important to understand
the significance of trend occurring on different time frames, and
managing trade expectations accordingly.
Below, the SPX breaks trend on the 4 hour. Provided nice short term
trading opportunities to the downside. As I said, it’s easy to watch a
smaller time frame and forget about the bigger time frames.
So let’s shift to the higher time frames to analyze it’s trend. Did the
weekly trend break? Nope. This is what we refer to as satisfying
trend. Price just can’t continue in one direction forever. That would
be silly, because no one would ever want to take profits, and
essentially market makers wouldn’t be able to profitably create a
market. Because of this, price must create retracements to satisfy
the trend… to satisfy the market creation process.
Volatility is equal across time frames. This means that significant
upward and downward movements within a longer term trend occur
similarly, just like the price action in the minutes of the intraday trend
that form a single daily candle. The decision is deciding on the time
frame to use for the basis of trading decisions. If using a daily chart
and in a swing position, trade expectations remain in the daily chart,
and you would be relatively unconcerned about wild intraday moves.
In the course of the intraday, you may see price trigger the area that
a stop was located, but if the daily candle doesn’t close at or beyond
that level, then your swing trade is still valid.
Understand the range and understand what needs to happen to get
to your target, as well as what must not happen (stops) to violate the
trade idea.
I use shorter time frames to get the best and earliest trade entries. If
shorting at resistance, look into the shorter time frames and wait for
the distribution to happen at the resistance level. If longing at
support, wait for the price action to come to support and begin to
accumulate. Patience goes a long way in this business.
TREND LINES
What are trend lines?
Trend Lines: Straight lines drawn on a chart below reaction lows (in
an uptrend) or above rally peaks (in a downtrend) that determine the
steepness of the current trend. The breaking of a trend line usually
signals a trend reversal.
Trend lines provide a visual understanding of price movements. If
price action does not break your trend lines, the trend remains intact.
Breaking the trend line means the candle closed outside of the trend
line. If price just penetrates the trend line, but does not close, then
the trend is still intact.
You can also think of trend lines as diagonal support and resistance
levels. The general rule is : “Short resistance. Long support.”
I’ve highlighted an example of what a Major trend looks like, and
example of an Intermediate or Minor trend.
What are Channels?
Channels: When prices trend between two parallel, or nearly parallel
trend lines.
Exampled below, major trends that formed channels in the S&P500.
Notice how price broke down below the channel lines, resulting in
market crashes/down trends. Another issue I see is that new traders
get hung up on the channel pattern itself, and forget what it actually
is…a trend.
Unit 11/18 Classical Support &
Resistance
Understanding and the ability to identify levels of support and
resistance is perhaps the second most important concept to learn
within this entire discourse on charting. Spend time researching the
internet or trading books on the topic of Support and Resistance, and
you’ll likely read the same mumbo-jumbo over and over again. It’s
important to understand the classic definition and illustration of
support and resistance to understand how I alter the concept for more
effective usage in regards to price progression. You will rarely hear
anyone concerned with how a level of support and resistance were
either gained or lost, or even how and why the level formed where it
did. How levels are gained and lost, as well as how they form,
relates to the formation of trend, and is invaluable for understanding
which direction your trading should occur. For now familiarize
yourself with the basic idea of support and resistance.
Support and Resistance: represent key junctures where the forces of
supply and demand meet. In the financial markets, prices are driven
by excessive supply (down) and demand (up). Supply is synonymous
with bearish, bears and selling. Demand is synonymous with bullish,
bulls and buying.
Support is the price level at which demand is thought to be strong
enough to prevent the price from declining further.
Resistance is the price level at which supply is thought to be strong
enough to prevent the price from advancing further.
The most common example found looks something the chart below. I
added two distinct trend lines that constrain price movements. Price
is unable to fall below a certain threshold or move higher than a
certain level. Price remains contained within the two lines. These two
lines, beyond which price is unwilling to move, are known as the
Support Level and the Resistance Level.
Lots of people use this type of zone or range example because it’s a
simple way to illustrate the concept. This illustration is fine if you’re
only going to be trading sideways markets, but what happens if you’re
trading trending markets?
This is a more accurate example of what Support and Resistance
actually looks like in a perfect world.
“But wait, why is price going through your levels, and does not
necessarily stop inside the box like the examples show me?”
And in real life, it would look something like this: When resistance
levels are gained or passed, it allows the price action to move
upward.
When support levels are lost, price is allowed to decrease further. In
order for the trend to be technically reversed, price must first reclaim
the previous support lost (which would now be a resistance), and
then reclaim the previous high overcoming that resistance level. On
the way back down, price will try to move to where it found support.
This support level will be the level price acquired to enable the move
up.
Support is a “price level at which there is sufficient demand for a
stock to cause a halt in downward trend.” Compliments
accumulation: “…After a decline, a stock may start to base and trade
sideways for an extended period. While this base builds…”
Accumulation will likely put upward pressure on prices.
Resistance is a “price level at which there is a large enough supply of
a stock available to cause a halt in an upward trend.” Compliments
distribution: “…After an advance, a stock may start forming a top and
trade sideways for an extended period.” Distribution will likely put
downward pressure on prices.
What does that mean? As price approaches a support level, I would
expect to see accumulation. As price approaches a resistance level, I
would expect to see distribution. In the classical support and
resistance example, that side ways action known as accumulation
and distribution is where levels are found.
Unit 12/18 Chasing The News
Login to any public trading chat room and I guarantee someone will
be asking the room, What news was released to cause this move?
Guys, what’s going on? Those guys are like heroin addicts, looking
for their next fix. News Addicts. Ever watch your favorite finance
channel on TV, telling you how great the rally is, or further upside is
expected due to some arbitrary upcoming news? Ever read your
favorite finance blog and wonder how they always seem to have a
news narrative to explain the reasoning for the sell off that you were
holding a long position in? Really think about it for a second. People
actually want you to believe that the world’s largest trading institutions
have time to read an earnings statement or any other financial news
release, in its entirety, process the information, and place a trade all
in the matter of a few seconds. Those analysts and traders must be
the fastest readers on the planet…(crickets)
The move is setup prior to the news! Remember… Accumulation,
Trend Up, Distribution, Trend Down?
Those institutions know well in advance what the news is going to
say. They pay lots and lots of money to know in advance. If you
spend the majority of your time researching news on whatever
company, when will you have time to actually read the chart? You’re
going to have no foundation from which to base your trade. While you
were busy trying to find rhetoric concerning the expected outcome of
the next Fed minutes, the trade happens, and you missed out. At
least with technical analysis you have a stable reference point that
can be shaped into a somewhat mechanical process.
You’re interested in trading a financial instrument. Does it have a
price chart? Yes Good, then we can trade it. Why? Because, every
chart behaves the same as any and every other chart.
Below is a chart of Bitcoin. I have no idea if any news was released to
create the move that occurred. Lot’s of traders claimed the move
occurred due to an upcoming technology concern for processing
Bitcoins or something. I honestly have no idea. Was it possible to
predict the outcome? Absolutely.
This was the chart I saw. I expected a move down from around 2600
with a target around 1800. But, but…that’s an 800 point move, nearly
30%! Is the distribution not clearly telling us that the move down is
setup? The high was lost, thus a trend down should be expected.
Don’t worry, I’ll explain what losing a high is in future lessons.
And the outcome…
A lot of people would call an 800 point down move a crash. The
panic was thick in some of the cryptocurrency chat rooms that
week. Coincidentally, the bounce came from the 1800 level that I
drew as the target more than a week in advance, because according
to the news, Bitcoin’s troubles were over.
During a EU rate decision meeting, the news addicts were out in full
force, begging to know why the market was moving so quickly due to
news that may or may not have changed any fundamental outlook.
Most people were speculating with no rhyme or technical chart
reasoning. They have no understanding of how charts move, or how
news is used to move price to certain key untested levels.
The setup was straightforward assuming you understand the basic
concepts. I annotated the trend up in purple and it’s two
corresponding trend starts. I didn’t draw all the levels or patterns, but
the focus was on the large pop from 1.1478. That’s the news traders
were trying to figure out. Price fell throughout the session, began
accumulating, created what some traders would call a false break
down, tested support gained (trend start) and ripped higher during
news release. Very easily traded with quick profits for any traders that
could read a chart.
There is something to be said about the news. If you understand the
move that is being setup, the news will often provide liquidity for your
trade. The news becomes a momentum catalyst.
Unit 13/18 Indicator Trading
When I started trading, I assume my journey was much like others. I
spent much of my time reading and learning about indicators. When I
think about all the indicators that have been developed, and the
traders that rely on them, I’m reminded of the “blind leading the blind”
expression. That’s not to say that indicators can’t be useful. They
can. The problem for most traders that use indicators is two-fold.
First, indicator traders typically do not understand the purpose of the
indicator, or how to use them. The second problem is that traders
become distracted by the indicators on their charts, and ignore the
price chart forming in front of their faces.
Here’s an example of what a typical indicator trader’s chart might look
like. All these pretty indicators, covering a large amount of the chart,
making it impossible to read. How many momentum indicators does
the trader really need? How many Support/Resistance indicators do
they really need? Sometimes I wonder if these traders secretly crave
visual stimulation. Chasing shiny objects…
Indicators also fail most traders because they don’t understand how
time frames work together. One indicator fails, so they add another
indicator, and then another, and then another, until eventually their
charts resemble the chart above. Maybe if I add another moving
average I’ll know when to buy. Maybe if I add the MACD and wait for
the averages to cross over one another, I’ll know when to buy?
What about RSI? That’s a common one I see with all the harmonic
traders today. Well, it’s overbought… I mean, it’s oversold. Think
about that logically for a moment. How can anything be overbought or
oversold. Who decides on the arbitrary price that suggests this idea?
Oh the indicator…righhhhhhttttt.
Usually, indicator traders have one thing in common. They want the
indicator to do the trading for them. They want it to tell them what to
do without having to think, or analyze the chart. When I’m trading, I’m
often looking at many different time frames together, to understand
the trend, levels, and momentum involved. I’m analyzing the chart,
making informed decisions based on technicals. If you’re going to
use indicators, why wouldn’t you look at the indicator on multiple time
frames? Why wouldn’t you analyze the chart? Does this mean that
indicators do not work? Of course they work. They tell you what
they’ve been designed to tell you. Most traders fail to realize that
indicators are lagging, and they are generally a non-price based
representation of the market. Price and indicators use the same data,
they’re just represented in different ways.
When a trader is starting out, most find indicators, use them for a
while, test various systems, fail, try more indicators, quit trading all
together, or maybe they find marginal success. Others continue on,
find a mentor, and revert back to naked, clean looking charts.
There’s nothing wrong with using indicators if used correctly;
however, the goal is to understand how to read a chart without
developing a dependency for indicators.
Unit 14/18 Divergences
Many traders like to point out how indicators produce divergences, or
are in a this or that cycle. They attempt to follow the indicator’s cycle
to enter a directional trade. If the cycle is down, they try to take a
short. If the cycle is up, they get long. Sadly, they learn some hard
lessons about how not to use divergences.
So what is a divergence exactly?
Divergence: A situation that occurs when two lines on a chart move in
opposite directions vertically. People often look for divergences by
comparing a stock’s direction to the direction of its RSI, it’s MACD or
its Stochastic Oscillator. There are two kinds of divergences: positive
and negative. A positive divergence occurs when the indicator
moves higher while the stock is declining. A negative divergence
occurs when the indicator moves lower while the stock is rising
The chart below is an example of how most people understand a
positive cycle. The fast and slow lines are diverged and rotating up.
Below is an example of how most people understand a negative
cycle. The fast and slow lines are diverged and rotating down.
I don’t particularly care for the methodology in the charts above,
because the indicators are lagging. I prefer an anticipatory
methodology that helps me identify momentum changes that will
ultimately cause trend changes. The process of accumulation and
distribution are how I identify momentum changes. I’ve listed
examples of how positive and negative divergences help illustrate
accumulation and distribution.
Positive Divergence: occurs when the indicator moves higher while
the stock is declining.
Negative Divergence: occurs when the indicator moves lower while
the stock is advancing.
How many traders were caught in a long position at the top? The
market kept going higher and higher. The fundamental bullish traders
thought this is where price would breach the highs and head to the
moon. Higher highs on lower and lower MACD is a text book
definition of negative divergence. A head and shoulders pattern is
known as a distribution pattern…
Why do divergences occur? Momentum. Specifically, momentum
being offset from a higher time frame. What causes higher time
frame momentum changes? Lower time frame movement or price
progression.
DIVERGENCE EXAMPLES
Unit 15/18 Utilizing MACD
MACD: Moving average convergence divergence (MACD) is a trendfollowing momentum indicator that shows the relationship between
two moving averages of prices. The MACD is calculated by
subtracting the 26-day exponential moving average (EMA) from the
12-day EMA. A nine-day EMA of the MACD, called the “signal line”, is
then plotted on top of the MACD, functioning as a trigger for buy and
sell signals.
As Investopedia.com describes:
“There are three common methods used to interpret the MACD:
1. Crossovers – As shown in the chart above, when the MACD falls
below the signal line, it is a bearish signal, which indicates that it may
be time to sell. Conversely, when the MACD rises above the signal
line, the indicator gives a bullish signal, which suggests that the price
of the asset is likely to experience upward momentum. Many traders
wait for a confirmed cross above the signal line before entering into a
position to avoid getting getting “faked out” or entering into a position
too early, as shown by the first arrow.
2. Divergence – When the security price diverges from the MACD. It
signals the end of the current trend.
3. Dramatic rise – When the MACD rises dramatically – that is, the
shorter moving average pulls away from the longer-term moving
average – it is a signal that the security is overbought and will soon
return to normal levels.
Traders also watch for a move above or below the zero line because
this signals the position of the short-term average relative to the longterm average. When the MACD is above zero, the short-term average
is above the long-term average, which signals upward momentum.
The opposite is true when the MACD is below zero. As you can see
from the chart above, the zero line often acts as an area of support
and resistance for the indicator.”
Most traders tend to use MACD crossovers, but I find this much less
reliable. MACD Crossover traders are generally in the infancy stages
of chart reading. Crossover traders tend to have little to no
understanding of market phases or why markets move they way they
do. They base their trading entries on an indicator average that has
crossed above or below another indicator average. Is this smart
trading? I don’t think so.
So how do I actually use MACD?
The definition of MACD states that (MACD) is a trend-following
momentum indicator. I’ve written some on momentum and explained
the process for waxing and waning momentum in previous lessons.
What was that process called again? Oh Yes…
accumulation and distribution. Naturally, if the MACD indicator
signals momentum, then MACD divergences should work well with
visualizing the accumulation and distribution process in offsetting
momentum for a trend reversal.
Below, I’ve provided an example of a 30 min Crude Oil chart to help
visualize how MACD could be utilized to aid in recognizing
distribution and accumulation. I marked a Daily level around
52.75. When price approaches a significant level, it must slow down
in order to offset its momentum before it can reverse trend.
If we look at the MACD on the bottom of the chart, a clear divergence
formed. MACD is divergent to price because price was trending
upward, yet MACD was sloping downward. This is a clear sign that
distribution is taking place, and is also an indication that price is
approaching a significant level, prime for a reversal off first touch.
Unit 16/18 An Introduction To
Trend
Trends are the most important concept to learn. Conceptually, trends
are simple, but unfortunately difficult to apply.
“What is a trend?” The most simple answer…a leg. Human legs can
be broken into three distinct parts: the foot, thigh to lower limb, and
hip regions. Charts can be visualized in the same manner.
Accumulation, trend up/down, and distribution. I’ve alluded to this
idea in the Cycles & Phases lesson.
More precisely, a trend is a move/trend that originates from where a
level of support was LOST or GAINED. The support gained and
support lost concept will come later. I use trends as a guide for price
action. Trends are created through a process.
“What is this process?” Price moves up and down through levels of
support and resistance,
which generate and disperse momentum, and in turn creates
trends/legs. The key to understanding chart reading, is
understanding how this progression works. The majority of this
course will focus on how the progression process works in greater
detail.
All trends have a trend start and a trend end (beginning and end).
Conceptually, the two are synonymous. Trend starts will always
attempt to target it’s opposite trend start. ‘Well, what does that look
like?” In the most basic sense, distribution targets accumulation and
accumulation targets distribution. I also just pointed out where trend
starts are found… in areas of accumulation and distribution– more on
this in the next lesson.
Trends can also become segmented. Trends within trends . This
happens because momentum is being shifted from lower and higher
time frames. Smaller time frames attempt to offset momentum
generated by higher time frame trends. Since the higher time frame
trends take longer to form, higher time frames have more
significance. The blue boxes below illustrates the trends within
trends concept.
The chart further below attempts to illustrate the idea that the lower
time frame chart, 60 minute chart on the left, produced various trends
contained within the higher time frame, daily chart on the right. This
is a rather simple concept that traders often struggle to grasp. They
often only view one or two time frames, which becomes a bad habit
that limits their view of trend and trends . If i said trends were the
most important concept to learn, why would anyone want to limit their
viewpoint? More on that later…
The same trend segments illustrated on a smaller time frame and on
a higher time frame. Trends form on all time frames, and in varying
candle numbers. Some trends form with many candles, while others
form with only one or two candles (also illustrated below).
I often hear traders unknowingly refer to trends as ‘structures’. If only
they understood how these structures work. For now, take some time,
review your own charts, and practice training your eye to visualize
trends . Study how trends form within trends. Study the congestion
inside them, you know… the areas of accumulation and distribution.
Study how levels of support and resistance form inside those trends.
As you move forward, future lessons will begin to break down these
concepts into more detail.
Unit 17/18 Trend Starts
I can’t stress this enough, understanding trend starts, is probably the
most important concept to learn. When I introduced the trend
concept in earlier lessons, I had to make sure you started training
your eye to separate trends from arbitrary price action, because at
the introduction, it was important that you learned to see trends so
that you could eventually break down and distinguish the trends
intricacies. When I started learning trends and trend starts, the
process was difficult due to my lack of understanding of how
retracements and other trend segments form. Nonetheless, the
question remains, “why are trend starts so important?” Trend starts
are important because this is where trend changes direction, and this
is where the largest profit opportunities are found. Trends starts are
also the most profitable trades because they generate the biggest
price repulsion away from levels.
Intuitively, you might assume that a trend start is the upper or lower
tips of a trend … but you’d be wrong. Below, is an example of how
many people intuitively, but incorrectly view a trend start.
This is not a trend start…
Many times I’ve seen people mistakenly annotate a trend start as a
swing high or swing low after I’ve introduced the concept to them for
the first time. If you were paying attention during the first trends
lesson, I said a trend start is the first level of support gained or the
last level of support lost, both of which must also be UNTESTED. (I
capitalized this word, because it is the most important word
describing a trend start.) If either of which have been tested, then the
level is no longer considered a trend start. In this event, I would scan
for the closest untested level gained or lost in vicinity of the tested
trend start. So what does as trend start look like?
Below, I’ve drawn out an example of a trend start. Shifting your
attention to the swing high highlighted in the blue box and annotated
as point 1., you will notice how a swing low was made from 1. down
to A. The trend start does not become valid until price from the low
at A gets above the swing high formed at 1. The reason for this is
because the level cannot actually become gained until price manages
to get above the swing high at 1. and subsequently took you to the
swing low at A. So essentially, a trend up is formed from A-B and
then C is a test of the trend start created within the AB trend.
Remember, I said a trend start has to be the first level gained or lost
and untested. On the chart a level existed at about $54.40, however
it was tested during the accumulation process preceding the trend up
from A-B.
I say understanding trend starts is so important because it allows you
to truly understand the progression of price movements within a
trend, and in doing so, you will understand where the most profitable
trades are located. How’s that? Because, the largest moves are
generated after testing a trend start.
Price always attempts to move from trend start to trend start… trend
start- up to trend start- down, and vice versa.
In previous lessons, I stated trend starts are generally formed in
areas of accumulation and distribution, and that accumulation will
target distribution and vice versa. Trend starts target trend starts.
Unit 18/18 Gaining & Losing
Support
As previously mentioned, I often refer to levels of support and
resistance as either: support gained or support lost. The reason for
this is because it’s a simpler way for me to keep track of upcoming
levels where price should target, without overly confusing the
process. The logic is simple. Support Lost would be referred to as a
level of support, and Support Gained would be referred to as a level
of resistance.
Generally, when price is moving in an uptrend, it will gain a previous
high, and eventually return to test it. Upon first test of a level gained,
price should bounce, or ‘pop’ higher attempting to test the immediate
level of support that was lost. This concept took me a few years to
really understand properly. Don’t worry if it seems confusing now. I
will include lots of examples throughout the course.
Price follows the same principle pattern over and over again. Price
moves from a level of UNTESTED support gained to a level of
UNTESTED support lost and vice versa, on all time frames.
GAINING SUPPORT
The example below highlights levels of support that were gained and
then tested, illustrating the ‘first touch’ pop. I drew levels where price
made a swing high. The highlighted circles are where price tested the
level of support gained for the first time, resulting in a pop.
The chart below is the same example as above; however I switched
the chart to a 2 hour time frame to illustrate the idea that it’s not
always possible to see the first test of a level on bigger time frames.
Often times the higher time frames will indicate the general area that
price will target, while the smaller time frames provide more detail
and precision on the exact price of that target. ‘Test of 2’ listed on the
chart cannot be clearly seen here on the 2 hour view.
Another important concept that also took me a few years to realize is
that when price gains a level, or a swing high in this example, the
bounce on the retracement back down will usually pop off the candles
high. Roughly, 10% of the time this does not happen, and the level
fails to gain.(Will be explained in-depth later). There’s so many
important concepts that can be gleaned by using simple logic and
common sense. Follow the chart below from point #1 and notice that
price gained the high made just to the right of where #1 is marked,
and continues to point #2, which also made a swing high. Price finally
gains #2 and continues to point #3. Common sense says this is what
trend does. For an uptrend to exist, a swing high must get gained.
The inverse is true for a down trend.
LOSING SUPPORT
In the chart below, I’ve drawn some levels of support that were lost,
and then highlighted the first test of each support lost. The ability to
draw proper untested levels of support gained and lost is essential to
finding targets. What do you notice about the down trend? Notice
that the downtrend continues to test levels of untested support lost,
only to be rejected and continue the leg down? If the leg down were
gaining levels, how could it logically be a down trend? It couldn’t… A
down trend must trend down, and an up trend must trend up.
As I said, this concept seems simple to me now that I’m explaining it,
but for a long time I wasn’t ever exactly sure or confident in my levels
until I realized that when a level is lost, the retracement back up will
test the candle’s low, and the same is true when a level is gained, the
retracement back down will test the candle’s high.
Any high or low made within the leg, has the potential to become
support gained or support lost. If a high or low is made and is left
untested, price will almost always come back to test it.
It’s extremely important that you spend time studying your own charts
to identify levels of support lost and support gained, as I will expand
on this concept later.
To gain support, price must get above the previous swing high that
brought price down to a low. To lose support, price must get below
the the swing low that brought price up to a high.
Module 2 Trading Meta
Unit 1/12 Support Gained,
Support Lost In Depth
In this lesson I want to break down the intricacies of gaining and
losing support, as well as how to actively identify and trade support
levels. Most traders, new and old, use a weird method of drawing
their levels of support and resistance. If you asked them to explain
what it means to gain or lose support, they will likely look at you like a
deer in headlights. The more clever traders might respond with,
“when price goes above or below the level.” Then when you ask
them, which level? Their hands start to get clammy. So what does it
actually mean to gain or lose support, and what does it look like?
This example alone is probably worth more than it’s weight in gold,
because it took me so much time and money to understand. Years of
digging on the internet and conversing with other traders spent to
learn this concept, yet I found it no where published online.
Let’s look at the picture above, focusing attention on point A. At A.
we can see a swing high was formed, where traditionally traders
would call a level of resistance. The high at A. can’t be considered
gained until price manages to get above the high at B. which initiated
the move down to the swing low at around $56.75 (not designated on
the chart). Price manages to get above B. at C. When this happens
we can consider A. gained, and would mark a level from the high at
A. to subsequently enter a long at the first touch of D., which is also
highlighted by a blue circle.
Now if we focus on the bottom half of the chart, I’ve also included an
example of losing support. I’ve designated a level of support, from a
swing low. From left to right, follow the text inscribed on the image,
and you can see how support becomes lost once price manages to
get below the swing low designated as “…here.” The blue box
indicates where price managed to get below, effectively losing
support and setting up a first touch short opportunity of support lost.
This concept is integral to my trading strategy. It happens on any
chart, any time frame, and any product. Here are two examples of
support being lost on Bitcoin BTC/USD, 15min chart. Starting from
point A. the move to the high at B. is initiated. C becomes the level of
support lost once price manages to get below the move that initiated
the move up from A, which happens at D, highlighted in the yellow
box. We would then mark a level at C, and wait for price to come
back to test C, which happens at E. At E a short position would be
triggered, with a target of the last support that was gained (not listed
in this chart). At F and G, the same scenario is represented for you
to study on your own. Why is G important in relation to F? What
happens when price manages to get below G, and how is this
important to F?
Take your time and study your own charts to identify levels of support
gained and support lost. This is the bread and butter of my trading
strategy. Below I’ve labeled a chart with levels lost and levels gained.
See if you can figure out where and why they were lost and gained,
and what happened on the first test of each level.
Unit 2/12 Failing To Gain
Support
The concept can only be learned after you begin to understand
gaining and losing support, as well as the characteristics of how
trends form. In earlier lessons I alluded that levels fail to gain or lose
approximately 10% of the time. I haven’t back- tested this figure so
the percentage could be more or less. You should know that this
occurs during a relatively small percentage of the time, but also
frequently enough that it warrants learning the concept.
In the picture above, focus attention on point 1. Here a swing high
has been made, followed by a small retracement. At number 2, price
finally manages to get above the high established at point 1. Thus
far, this is perfectly normal price action that we would expect to see
as a trend has formed. At number 3, price behavior begins to deviate
from what I would expect to happen as price retraces to test the high
at point 1. Normally, I would expect price to test the high made at
point 1, and continue higher. This does not happen. Instead price fails
to pop at the first test of point 1, failing to gain the previous high.
Failing to gain a level is the same as losing support. Thus this high
failed to gain.
From here, I would mark the level that failed to gain and wait for price
to reestablish a first touch, which happens at point 4. The first touch
is a valid first touch because failing to gain is treated the same as
losing support. Upon entering short, your first target would be the last
level gained. Your stop would also be set just above the new high
formed at point 2. Getting above this high would indicate that trend
will likely continue higher and invalidate your trade short.
There is no reason to enter the trade anywhere except for a first
touch.
In the example below, I labeled the same process of failing to gain,
but for LTC/USD in cryptocurrency market.
Unit 3/12 Failing To Lose
Support
As you might have guess, failing to lose support is the inverse of
failing to gain. As I’ve said before, all markets essentially do the
same things over and over. Just as failing to gain support, failing to
lose support happens approximately the same amount: 10% of the
time. In the example below, price makes a low at point 1. Price then
makes a new low at point 2, and should have smacked back down at
point 3, designated by the black dotted arrow. I drew the dotted
arrow to express the idea of what trend would have been expected to
do if trend were to continue downward. Because price failed to lose
support at point 3, it is then considered gained. Price eventually gets
back above the low at point 1 and eventually retraces back down to
the price of point, designated as point 4. At this moment, a trade
should be taken long at the first touch support at point 4, with targets
of prior support lost, also arbitrarily designated in the chart for you. A
stop would be placed just below the low at point 2, where price would
invalidate the trend reversal. Remember: failing to lose support =
support gained and should be traded as such.
I also want to add something that may or may not look familiar to you,
depending on your study thus far. I briefly touched on patterns in
earlier lessons, and you may have noticed that failing to lose support
looks very similar to a bottoming Head and Shoulders (HnS) pattern.
I stole this image from wikipedia.com. Notice the pattern is very
similar to the chart I drew, but there’s a key difference in how I
analyze the pattern and how typical traders recognize the pattern
using flawed, regurgitated technical analysis found all over the
internet . The key difference is that the typical trader focuses on the
pattern and an established neckline, where as I focus on the logic
behind the pattern, and where price fails to lose support to continue a
downtrend.
What does Wikipedia have to say (as well as many other online
sources)?
Importance of neckline (Wikipedia)
The drawn neckline of the pattern represents a support level, and
assumption cannot be taken that the Head and Shoulder formation is
completed unless it is broken and such breakthrough may happen to
be on more volume or may not be. The breakthrough should not be
observed carelessly. A serious situation can occur if such a break is
more than three to four percent.
When a stock drifts through the neckline on small volume, there may
be a wave up although it is not certain, but it is observed, the rally
normally does not cross the general level of the Neckline and before
selling pressure increases, the steep decline occurs and prices
tumble with greater volume.
You see, the neckline … an arbitrary level of support that really plays
no role in how I trade, yet loads of traders whom have learned about
Head and Shoulders patterns focus on the neckline, simply because
an online source tells them to do so. Also notice how these types of
traders would wait for price to break the neckline before entering the
trade, while I would have already been long the trade at first touch of
support gained, which we’ve now established as failed to lose, and is
also the same level as the ‘right shoulder’ in the Wikipedia HnS
example.
I prefer to trade with understanding instead of ‘waiting on
confirmation‘ as many online sources would have you do, causing
you to miss many great scalping opportunities.
Unit 4/12 Gaining & Losing
Support In-Depth: Peaks &
Valleys
In the last few lessons I’ve attempted to explain gaining and losing
support in detail. In this lesson, I want to focus on another aspect of
gaining and losing levels that may not seem as obvious at first
glance. There is a fairly simple process that I use, which becomes
second nature after training my eyes to focus on concepts that I want
them to see.
In the example below, I’ve denoted a down trend highlighted in the
purple box, establishing a high made at point A and a low at point B.
In order for a level to become gained, price must breach the high that
initiated the move down. As the example depicts in the yellow circle
at point C, price manages to breach, and close above the previous
high established at point A, which was the high that initiated the trend
down to point B. Notice, I said price breached and closed above the
high at point A. For a level to become gained, it is more significant if
price closes above the high. Just simply breaching the high and
closing below it, is technically gaining the level; however it will have a
greater chance of failing to hold and bounce from the first test of the
levels untested in between points A and B.
The concept was simple enough. Now where would I enter a trade?
Do I immediately get long once I see that a level was gained? No.
As I’ve stated throughout the lessons thus far, we are only interested
in trading first touches. This is no different.
In the example below, I tried to illustrate the concept as best as I
could. The giant upside down purple triangle is my interpretation of a
‘valley’ created from gaining support. Seeing a valley is not enough
alone, but when we look inside that valley created, we can gather lots
of information about levels created. Levels are created and test
generally at any one of three places at a valley: the high of the valley,
the low of the valley, and levels created inside the valley. Looking
inside the valley, I marked levels generally from highs and lows, and
also the opens and closes of candles. I also scan to the left of the
valley looking to see if those open/closes and highs/lows generally
line up with where the level is thought to exist. Marking the levels
this way, gives me a general understanding or queuing of where I
would expect to see a bounce off a first test. To be more precise, I
would need to shift to a smaller time frame and look more closely at
the candles near the areas where I’ve drawn untested levels. Also
notice, I’m drawing my levels from the trend that took me down to the
low of point B. This is the trend I’m referencing, because it is where
the levels are gained. As you can see highlighted in the yellow
circle, the first test of the level drawn produced a nice bounce. Very
simple, yet very logical technical analysis.
You might be asking yourself, what happened with the other levels
that were untested inside the valley? Well what do you think
happened? Wouldn’t we expect a bounce from a first touch? Notice
the green triangles here, all producing first touches, generally from
the untested levels we drew from inside the valley. So when Bitcoin
was crashing and people were panicking, the educated trader would
have known how to find buying opportunities.
The only problem with this trade is that it took a while to retrace back
to those levels. Maybe you think I’m just making this stuff up, getting
lucky?
Better later than never.
Losing support is the exact same concept as gaining support, but in
reverse. Instead of created a valley, price will create a ‘peak’. Simply
follow the move up from the base of where the peak was formed and
mark your levels once price gets below the low that started the move
up.
If you follow along and look inside the peaks designated above, you
should easily understand why price reversed at a first touch. I didn’t
mark every level, but if you understood the more in-depth explanation
of gaining support above, you should be able to understand this
concept as well. If not, re-read the above and study the examples
until it makes sense. The red arrows indicate first touches of levels
lost inside the peaks.
Unit 5/12 Points Of Invalidation
& Stop Losses
If you’re completely new to trading, a stop loss is essentially the only
real way you can manage risk as a trader, becomes it closes the
trade a point of invalidation.
Stop Loss: An instruction to the broker to buy or sell stock when it
trades beyond a specified price. They serve to either protect your
profits or limit your losses.
The next thing you’re probably asking yourself is, what’s a point of
invalidation? Good question.
A point of invalidation is the point where price invalidates a trend,
which should theoretically invalidate your trade.
I used the same chart for this example because it’s a really nice and
clear example. I’ve illustrated a segment down trend and it’s swing
high. In this example, let’s presume you entered a trade short,
expecting price to fall. No matter your entry, until price managed to
gain support and get above the swing high that took price down, the
short would be technically valid. Your stop loss would be placed just
above the swing high, as a means to limit the amount your account
would lose once the trade was invalidated. Depending on your length
of time set aside for a given trade, you would need to adjust your stop
in relation to trend. A swing trade idea would likely have a larger stop,
because you would be more concerned with more significant points of
invalidation found on higher time frames.
For scalping, smaller time frame charts would offer better invalidation
points for your stops.
In the example below, I’ve included a hypothetical trade where the
trader would have bought GOLD based on a level of support being
gained. Assuming the trader saw that support had been gained, the
trader could have waited for the pull back to the first test of support,
and entered long. The point of invalidation would immediately be the
swing low where support was created within. Getting below that
swing low would essentially invalidate a trend change, and would
likely signal a down trend continuation. Perhaps the long entry
produced a nice profit of approximately 10 points, but the trader did
not exit the trade. Price eventually would have reached their stop
loss, and the trade was yield a small loss of approximately 3-5
points. Instances will exist where you’re trade is stopped out, only to
reverse and re-enter a profitable area. In this example, price
technically invalidated the long by breaking below the point of
invalidation, and then bouncing much higher. This could have been
avoided if the trader understood where to take profits at prior support
that was lost.
Here you can see that once the point of invalidation was triggered,
price managed to eventually continue trending lower.
Unit 6/12 Losing The High
One of the most significant ways to identify trend change is when
price loses the high. In the example below, the highlighted yellow box
illustrates the move that took price to the swing high, or in other
words, the last significant low that produced the swing high. When
price manages to retrace below the low that brought price to the
swing high, the high can be considered lost. Losing the high usually
indicates a trend down will follow. The concept should be adapted to
every time frame, and can be utilized for scalping or swing trading.
The monthly chart below illustrates the SP500 Crashes of 2000 and
2008. Both were completely technical, and both lost the high. Had a
trader been aware of this concept, they would have known to cover
their longs or prepare for a significant move lower. Generally, once a
high is lost, you should not immediately get short. The safest trades
are always at first touches of supports lost or supports gained. This
scenario is no different. Almost always price will lose the high, and
bounce to test a level of untested support lost. This untested level is
the ideal entry to short. The charts should be self explanatory;
however it is worth noting that losing the high on a higher time frame
is always more significant than a smaller time frame chart. Losing the
high on a monthly or weekly chart will generally indicate a very large
move down, if not a crash.
The type of product makes no difference, because price action is
essentially the same on all asset classes. A chart is a chart. Bitcoin
was no different.
GPRO was no different either.
SNAP…
Forex pairs are also not immune to losing the high.
I could go on and on with examples, but I think you get the idea.
Losing the high almost always indicates an extremely large down
move will follow.
Thought I’d leave this here…
Unit 7/12 Gaining The Low
This lesson is essentially exactly like “Losing the High” but inverse.
Gaining the low is a significant indication for a down trend reversal.
Similarly to the previous lesson, I’ve highlighted the swing that
brought price to a swing low. Once price manages to get above that
high that brought price to the low, the low can be considered gained,
and an uptrend should follow. It’s worth mentioning that just because
a low has been gained, this does not mean to immediately take a
long position. As always, it’s generally better to wait for a
retracement first test of a previous support gained as an entry point.
The chart below was an especially panicky time for the world. The
2008 housing bubble had burst, and the SP500 had crashed.
Tying in previous concepts that shouldn’t be foreign to you, I wanted
to point out that during the process of gaining a low, accumulation
should be evidenced. Remember not to just look at one aspect of the
chart, or one concept. Put it all together to form the picture of what is
happening.
I’ve included various time frames because I want you to understand
how this concept is applicable for all time frames.
FB was no different. You should also have noticed that gaining lows
and losing highs is applicable within any trend or trend segment.
And Bitcoin… I’m leaving the text blank for this one. Hopefully by
now you get the idea?
Unit 8/12 Trading Accumulation
& Distribution
Sometimes during the accumulation process, it can be difficult to find
the proper level for entering a long position because multiple levels
form inside the range. An easy way to simplify this is by finding the
candle that produced the swing low, and then mark that same
candle’s high. The reason this occurs is because the candle that
produced the low will often either be a significant level of support or a
trend start. It’s important to remember that this is a general rule of
thumb, that does not always work, but I find it’s accurate enough to
use.
The concept can also be applied to smaller time frames.
During the distribution process, the concept works in the inverse.
Keep in mind that you will often see this more frequently on smaller
time frames, and it may not work as well on higher time frames.
Unit 9/12 The 8/30 MA Cross
Lot’s of beginner traders gravitate towards the use of moving
averages. As I’ve stated before, utilizing indicators can prove to be a
powerful tool, assuming you use it correctly, and understand it’s
purpose. I’m including this lesson and strategy because it’s
something I’ve learned that can be useful.
Moving Average (MA): An average of data for a certain number of
time periods. It “moves” because, for each calculation, we use the
latest x number of time periods’ data. By definition,
a moving average lags the market. An exponentially
smoothed moving average (EMA) gives greater weight to the more
recent data, in an attempt to reduce the lag.
Moving averages smooth the price data to form a trend following
indicator. They do not predict price direction, but rather define the
current direction with a lag. Moving averages lag because they are
based on past prices. Despite this lag, moving averages help smooth
price action and filter out the noise.
In earlier lessons I explained that indicators generally fall into one of
two categories: support/resistance or momentum. Moving averages
fall into the support/resistance category because they define levels of
S/R.
If you’ve gotten proficient at identifying levels of support and furthered
the distinction by identifying whether or not the level was gained or
lost, then using MAs is not necessary. New traders whom may be
struggling with properly identifying levels of S/R may find this strategy
useful. Many traders use some version of a moving average cross
over as a means to identify trend changes and entry points. The
most common periods used are the 20, 50, 100, and 200 period
MAs.
In the chart below, I’ve added an 8 period (cyan colored) and a 30
period (orange colored) moving average. I’ve highlighted areas
where the MAs crossed. The idea here is that generally I would
expect to see a retracement back to the level highlighted at the
crossing of the MAs. It’s always important to note whether the level
was actually gained or lost and left untested. The spot where the
MAs crossed, if left untested will provide a general entry and usually
a confirmation on change of direction for trend. The arrows drawn
indicated where price managed to retrace to the point of the MA
cross. Again, if you’ve studied and can identify levels already, you
will understand the technical reasoning behind why this strategy
performs as expected.
Same concept applied to USDJPY.
Unit 10/12 Fibonacci
Retracements
A lot of traders use Fibonacci retracements to find levels of support
and resistance. I purposely waited to introduce indicators because I
think it’s important to first understand the technical reasoning behind
price movements, and then implementing strategies with indicators
will just provide shortcuts for what you already know.
Most Fibonacci Retracements tools use four common retracements:
23.6%, 38.2%, 50%, and 61.8%. The 23.6%, 38.2%, and 61.8% stem
from ratios found within the Fibonacci sequence. The 50%
retracement is not based on a Fibonacci number. Instead, this
number stems from Dow Theory’s assertion that the Averages often
retrace half their prior move.
I’m not going to dive into the depths behind the Fibonacci
mathematics; however it’s worth noting that Leonardo Pisano Bogollo
(1170-1250), an Italian mathematician from Pisa, is credited with
introducing the Fibonacci sequence to the West. It is as follows: 0, 1,
1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610……
When I first learned about Fibs in my early trading days, I went crazy
trying to research and understand how and why they occur in
markets. It wasn’t until later that I came to accept the idea that Fib
sequencing is probably nature’s simplest formula for growth and
decay, and is probably why it occurs so frequently. The truth is, I
have no idea why the phenomena occurs.
The important thing to remember is that Fibs offer insight into the
area where levels form. Generally, fibs will highlight an area of
consolidation on higher time frames to help queue your eyes as to
where levels are located. Read that again. I’ve said it before…
Levels are found where? … At areas of consolidation. What else do
we call consolidation? …Accumulation and Distribution. We’ve gone
full circle haven’t we?
The same applies to higher time frame levels when not using Fibs, it
makes no difference. If you take nothing else from this lesson, take
this: Higher time frames identify the general location of a level, while
lower time frames identify a more precise location for the level.
I’m probably not going to delve into the idea of harmonic patterns, but
when I utilize Fibs, I do like to include harmonic ratios.
Harmonic ratios are derived as follows:
Primary Derived Harmonic Ratios:
0.786 = Square root of 0.618
0.886 = Square root of 0.786
1.130 = Inverse of 0.886 (1/0.886)
1.272 = Square root of 1.618 (or the inverse of 0.786 (1/0.786))
Complementary Derived Harmonic Ratios:
0.382 = 0.618^2 (or 1 – 0.618)
1.414 = Square root of 2.0
2.000 = Square root of 4.0 (or 1+1)
2.236 = Square root of 5.0
2.618 = 1.618^2
In the chart below, I used the Fib Retracement tool to measure the
ratios of levels inside of a leg or local trend. Here you can see I
started from the bottom of a leg up, and drew to the swing high. I’ve
highlighted areas that price made temporary reversals in conjunction
with fib ratios. This is the exact same thing you would expect to
happen at the first touch of a level. What is useful about using Fibs is
that it’s possible that you may miss a significant level because the
level may appear unclear. In this example, without using the Fib tool,
I may have missed the level located around the .0236 retracement.
This is because the level does not clearly jump out at me on the
chart. Knowing that a retracement level was there, I would be more
inclined to investigate the area on a smaller time frame as a means to
decide how significant the level is, and if it is actually untested.
Here is another example of how Fibs are used to highlight the
presence of levels. The blue shaded areas should help generally
identify the approximate area of where support and resistance levels
are located.
In previous lessons we discussed the idea of leg segments. Leg
segments are essentially just trend segmentation. Levels still form
inside of leg segments, so it logically follows that a trader could draw
fibs from the swings of segments to find local levels inside the
segmentation. Below, the Fibs drawn in orange are the levels
highlighted inside of the trend segment, illustrated within the large
blue arrow, while the ratios in black are from the larger leg depicted in
the chart above. You may also notice that some levels tend to
overlap. This concept is known as Fib confluence or something
similar. Traders that do not seem to understand trend, like to go on
and on about level confluence… this and that.
Maybe I’m missing something, but I think it’s just an over-complication
due to a lack of understanding, but really common sense tells me that
this confluence suggests that trend/levels are fractal.
Some traders like to go crazy and draw Fibs all over their charts. If
that helps you make better trades, do whatever you have to do. I
don’t mind using Fibs as a way to sort of check my work, or assist in
identifying levels that may not appear clearly.
Unit 11/12 Fibonacci Extensions
Fibonacci extensions are used in Fibonacci retracements to predict
spaces of resistance and support in the market. These extensions
involve all levels drawn past the basic 100% level; they are frequently
used by traders to determine levels of support/resistance.
I predominately use Fib extensions in situations where either an all
time high or all time low have been made, and there has been no
price action to identify levels. In the example below, imagine that the
leg depicted with the blue arrows was the current price action.
Traders at this point would not have a past chart to gauge the location
of future resistance levels. By using Fib extensions, it’s possible to
identify potential future levels before they occur. In this example I
drew extensions from the swing low and swing highs of the leg
illustrated with blue arrows. The extension tool then calculates ratios
and plots them on the chart. From there I would have to gauge
momentum and watch how price reacts at various extension levels for
trade entries and exits. Notice how price managed rejections at the
fib extensions drawn here.
The same concept can be applied when price breaks below an all
time low.
Most charts have the extension tool as well as the retracement tool.
Both tools essentially work the same way. If you wanted, you could
program a regular retracement tool with rations greater than 100% to
find extension levels.
Below is an example of a normal Fib retracement tool, highlighted in
yellow, and programmed with extension levels in purple. Notice how
once price got above the 100% mark, it experienced retracements at
the highlighted extension levels.
Unit 12/12 Parabolic Price
Action
Since I’ve learned how to use the accumulation and distribution
process, every move in the market becomes parabolic. This also
makes trend-lines rather obsolete. You may not have noticed, but the
markets essentially do the same things over and over again. A move
down, accumulation occurs, sideways basing, and ultimately followed
by a move up. Distribution is simply the inverse. As I’ve said before,
patterns can be understood either accumulation or distribution taking
place. Understanding the parabolic move is about understanding the
trends…prior trends.
If you have a firm understanding of accumulation, distribution, and
trends, it should come as no surprise when price moves parabolic.
By now, you should know that news has nothing to do with the
technical reasoning of price progression. If you still believe news is
the reason price moves, you need to go back and read the prior
lessons.
Before we continue, I want to preface that there is nothing wrong with
using trend-lines if they help you understand trend. Understanding
trend is analogous to understanding trends. The purpose of
explaining parabolic moves should be somewhat obvious to you. The
process of accumulation/distribution, trend, and momentum all
working together explain the reason why trend-lines fail. Many
traders draw trend-lines all over their charts, and don’t know what to
do when the trend-line breaks, tests a level of untested support lost,
and them reverses in their face. The chart below illustrates a
significant trend-line breaking. The price action in 2017-2018 is
simply a result of accumulation from 2016-2017, and the template
price is following is the leg down from 2014 where highs were made
at 6.50. I’ve also indicated where the initial trend-line breaks and
tests levels of support that were lost and untested. The above chart
illustrates the parabolic move, and the below chart illustrates the
technical move with trend-lines.
Hopefully, the next time you see a trader drawing trend-lines all over
their charts, you’ll wonder if they actually understand trend…
Module 3 Price Action & Trend
Analysis
Unit 1/9 Trend & Common
Sense
I’ve briefly introduced the idea of trend in previous lessons. This
lesson will attempt to shed light on some common sense ideas within
trend that should seem obvious, but really aren’t so obvious to most
traders.
Trend: Refers to the direction of prices. Rising peaks and troughs
constitute an uptrend; falling peaks and troughs constitute a
downtrend. A trading range is characterized by horizontal peaks and
troughs. Trends are generally classified into major (longer than a
year), intermediate (one to six months), or minor (less than a month).
The example below clearly depicts a down trend constituting falling
peaks and also an uptrend constituting rising peaks. Straight forward
concepts that should be obvious, but aren’t always. Often I hear
many other traders explain this concept with the verbiage of higher
highs or lower lows, of which both are correct and in line with the
concept of trend.
Same idea, just different terminology.
People typically have no problem understanding this concept, but for
some reason, they fail to apply the concept with a bigger picture.
They forget how to apply common sense. If an up trend is to
continue, it must continue to gain levels of support, just as if a down
trend is to continue, it must continue to lose levels of support.
The example below should help illustrate this concept in more detail.
I’ve color coded leg segments inside of the down trend. Each box
has a respective high and a line pointing to price failure at those
highs upon first test. If you’ve studied the past lessons, this should
not be foreign to you, because you know to expect failure at first
tests. Also notice how price begins to gain levels of support. Gaining
support after being in a down trend should be a big clue that trend is
changing. Trend will always change on the smaller time frames first.
Price must exhaust or overtake the high of each colored leg segment
in order to advance higher, into the next segment within the down
trend to the left.
The above chart should have either been an epiphany for you, or a
dull moment where you say, I already knew this…common sense.
Well they say common sense isn’t that common, so I had to explain
it. Recognizing trend and what has to happen to change trend,
should allow you to make better trading entries and exits while
determining price direction.
Unit 2/9 Deconstructing The
Trend
The more you study Technical Analysis the more complex the ideas
become; however the more you learn, the more simple the entire
study becomes, and much of the complexity can be discarded.
Since Bitcoin has been such a hot topic, I wanted to take a moment
and deconstruct the price action within a trend.
Below, I’ve drawn a 4hr chart illustrating a primary trend down from
points A to point B. If price manages to get above A, it will
immediately go to the next level of resistance above A. If price gets
below B, then it would immediately target the nearest support below
B. Straightforward I know, but many people forget the basics of
trend, support, and resistance.
From here, I’ve isolated segments of trends from 1-5. Generally,
segmentation occurs because a level was encountered, where it was
not tested in the process of accumulation or distribution. Noting that
a down trend was produced, distribution must have occurred to assist
the selling process. As price creates a down trend, untested levels
from the trend to the left become exhausted, creating the bounces
from (1st touch) and then re-test to break through them on (2nd
touch) down toward the next level of support. If by chance that level
was already tested, it will become a 2nd touch scenario, which will
allow price to continue down to the next level of support.
All I’ve done below is illustrate where the levels in the above chart are
coming from, so you understand why they were formed during the
first test process. Essentially, if a level is gained during the
progression, it will recreate the first touch setup. This occurs at
example number 2 and 3.
Utilizing the primary trend down, you should be able to follow the
progression resulting from the accumulation process found from point
B (bottom of trend) back upwards towards levels of untested support
near point A. The chart doesn’t highlight every single level, but it
should be general enough that you can understand and visual the
corresponding tests of support lost of levels numbered in black, and
the subsequent tests numbered in blue. The idea/rule of support and
resistance is that when a level is created, or more specifically in this
example, when a level of support is lost (seen numbered in black),
that level will become resistance on the way back up the trend (seen
in blue). You should also notice that the first touch failure at each
blue number, but how usually the second approach allowed price to
progress through the level.
Unit 3/9 Smaller Time Frame
Trends
I’ve written a lot to do with trend and surround concepts. It’s easy to
confuse yourself with trend when switching from higher time frames
to lower time frames. In the previous lesson I left you with the 4hr
chart below. Following along was probably a fairly easy task for you,
if you know how to match corresponding numbers. In this lesson, I
wanted to break down the same price progression that occurs on
smaller time frames. Price will spend a large amount of time
progressing through the smaller time frame levels in the process of
progressing to higher time frame levels. Also, while viewing a higher
time frame, smaller time frame levels may not be visible. For this
reason, you must make a habit of viewing all time frames.
In the chart below, I’ve kept the same chart as above, but switched to
the 15 minute time frame. The levels in orange are smaller time
frame levels, that may not be seen clearly on higher time frames.
Each subsequent high formed at points a, b, c, and d (labeled in
orange) are all first touches as a result of the accumulation process
that occurred down to the 6000 level low. In the previous lesson, I
illustrated from where the 6000 level came. The progression behaves
exactly the same as it would on the higher time frame charts.
Notice below how levels are being gained. In case you haven’t
figured it out by now, we use the vocabulary: support gained,
because it refers to the level of resistance where price got above,
causing the level to become support the next time price visits. Follow
the blue arrows to understand how the accumulation process was
visible on the smaller time frame first, as levels were gained,
consequently offsetting bearish momentum from the trend down, and
as a result, attempting to reverse trend to the upside.
If you were able to recognize the higher time frame level of support at
6000 (which I’ve drawn for you below), recognize that accumulation
should occur as price approached the 6000 level, you could have
made some nice scalps during the process. By this point in the
course, you should be putting concepts together to understand how
momentum logically creates trend. If I know a significant level of
support is waiting below the current price action, would it not logically
follow that momentum would need to first slow down before a
reversal could occur? If a reversal was to occur, wouldn’t price need
to gain levels of support where they were previously lost? Notice the
bullish wedge pattern forming on the 4hr chart? Didn’t we already
review what patterns were?
How can I confirm if I’m seeing accumulation? Check the lower time
frames.
Unit 4/9 Price Action &
Momentum
This lesson should highlight and reiterate key points that you should
have picked up on by now. Study these concepts and practice them
one at a time until you’ve mastered each. For example, if you’re
trying to learn levels, stick to levels until you have mastered them. If
you’re trying to learn momentum, study momentum. Maintain your
focus for each, and your understanding will come more quickly.
When price is trending down, look to the immediate left and use the
trend that brought the price up.
When price is trending up, look to the immediate left and use the
trend that brought the price down.
The trend on the left describes the levels that you will be encountered
as you move up/down the trend.
How are levels found?
Levels are found at points of consolidation. If a pause occurs in the
price action, it happens because a level is probably located at that
price. If you look further to the left of the trend, and you see general
areas of consolidation, then a level is also likely located in that area.
The point of support and resistance is that those levels provide…
Entries and Exits. It seems difficult to understand why traders use the
terms but have no clue how to identify them nor have no idea as to
what they really indicate.
It’s extremely important to learn that levels, whether in the function of
support/resistance when approaching them, must be
respected/exhausted whenever traveling through them.
When price approaches levels, at the first test, price will be repelled.
“Fake out ” rallies and retreats, or even better…fat fingers are
commonly referred to by traders that don’t understand price action.
The price reaction at these areas occur because a level was
respected. It was repelled significantly because the level was
significant and a likely a first test. This concept is the paramount idea
of support/resistance.
When will price actually progress through a level of
support/resistance?
Momentum provided, price will move through a support/resistance on
the second attempt.
Momentum allowing… If price has been in a longer term distribution,
why would you think price would continue to new highs?
Unit 5/9 Trend Confusion
Traders have a tendency to confuse themselves with the leg
concept. Some cover their charts with levels, where the cluttering
makes viewing the candles difficult. By now you’ve probably learned
that less is more. In other instances, traders want to scalp but then
they look to trade off the hourly, 2 hour or worse the 4hr chart. Sure
you can find nice trades on those time frames, but to scalp? It should
be common sense to you that those time frames are not used for
scalping. Consider your time to profit. How long is your trade likely
going to take if you’re trading from the 4 hour chart? Higher time
frames should be used to find levels of importance, relative to the
current price action. Wouldn’t it be better to just pay attention and
draw levels that are significant for now? Levels of S/R have to be
exhausted first, and many times traders call out levels that aren’t
technically possible. Remember the first and second touch concept?
Consider what is currently possible for your trade.
Commonly, I hear traders talk about indicators not lining up together,
I’m accumulating here, but distributing there. How can the chart
possibly be accumulating and distributing at the same time? Traders
cannot seem to relate the price action of one time frame to another.
They see what is going on in a higher time frame, then become
confused because the lower time frame travels in the opposite
direction. The complaint about indicators not lining up serves to
strengthen the fact that they have little to no understanding of time
frames and how markets move all together. Yes, larger moves do
occur when they line up, but there are other ways in which
indicators line up independent of how they are pointing. Ever
consider progression?
Many traders over complicate, lack understanding, and rely on news
and indicators as a crutch to support their views/bias. What
happened to understanding basic technical analysis?
Traders think that things in the charts just happen. But, you already
know the charts must first set up everything that happens. Trends
also setup. In order to trade the trends, you must understand the
progression of trend. You must know what has been tested before.
You must know how the market has moved to setup a rally or a
retracement in the time frame you are looking to trade. If you’ve
considered taking a position on a higher time frame chart, wouldn’t it
be helpful to understand how the shorter time frames have setup?
The correlation that you should be aware of is how your higher time
frames and lower time frames work together. Some traders put effort
into correlating other market entities, when what matters most is
already in front of their faces. Charts develop over time. How do you
know things setup over time? How do chart patterns develop?
Traders love to deny the obvious because they are so brain washed
about the news and correlations–brain washed about other things
that are inconsistent and irrelevant. In order to eliminate confusion,
you must discard mythical thinking and focus on the single thing
being described on your charts.
Legs as a concept is quite simple: when traveling down the leg, price
will bounce at the untested support that started the leg up. When
traveling up the leg you find resistance at the support lost that started
the leg down.
The leg you are currently retracing can describe how the longer term
progression. If price is accumulating/distributing in the longer term
progression, the market should trend side ways. During the
accumulation/distribution phase, price will also test the significant
levels to clear the path for the bigger move up/down.
When a trend is produced as a result of a bounce, two key areas
exist where price will find strong support or resistance:
Strong resistance will be located near the top of the leg where price
finds support from the leg’s high. This occurs because that level will
always be a first touch situation when price retraces back up to it. If
trend does not have strong momentum when price gets there, it will
always fail.
How do you determine the momentum leading up to that spot? Look
at the lower time frame. Where will price experience the resistance
and see the magnitude of its influence? The lower time frame. How
do you gauge the magnitude? Was their significant momentum
erosion signalling distribution? Does a chart pattern exist illustrating
topping on approach? A chart pattern? Yes, the price action will tell
you what it will do and should coincide with weakening momentum.
Do not ignore price action. Don’t ignore simple chart patterns. Do we
not use chart patterns to help us see progression?
The second area is near the bottom of the trend, where the move up
started. Strong support will be located near the bottom of the trend;
where price finds resistance at the trend’s low. This occurs because
that level will always be a first touch situation when price retraces
back down to it. If trend does not have strong momentum when
price gets there, it will always fail.
Unit 6/9 Reversal Vs.
Retracement
Throughout your trading career, you’ve probably heard the
expression, “Don’t try to pick tops and bottoms." People parrot this
idea because it’s a difficult task, but what exactly do they mean? Are
they saying not to try and get the top/bottom tick, or are
they generalizing about the top/bottom’s vicinity? I generally agree
with this adage, but only to a degree. I normally won’t try to get the
top/bottom tick in the trade, but I will take trades near the
tops/bottoms of legs if I recognize trend completion.
Some traders may struggle with differentiating reversals and
retracements. By definition, a reversal suggests a change in trend,
where a retracement suggests a more temporary change in direction,
that does not invalidate the greater directional trend.
Reversal: a change in the direction of a price trend, which can be a
positive or negative change against the prevailing trend. On a price
chart, reversals undergo a recognizable change in the price structure.
A reversal is also referred to as a “trend reversal,” a “rally” or a
“correction.”
Retracement: temporary price reversals that take place within a
larger trend, but do not indicate a change in the larger trend.
At first glance, these two concepts are similar enough to confuse the
new trader. We pose a few questions that will act as a qualifier to
help determine if a reversal has occurred or if it’s just a temporary
retracement.
Consider the previous lessons where we discussed the Fibonacci
Retracement tool. Notice how the tool approximates levels of support
and resistance within the down trend. These retracement levels are
simply temporary counter-trend moves within the bigger trend.
Below, I’ve deconstructed a retracement within a downtrend. The box
highlighted in blue identifies the retracement. Often a retracement
will form levels of support and resistance within itself during the price
progression. The section highlighted in yellow details the price action
resulting from the progression and testing of levels within the
retracement.
Notice how price did not manage to gain support after the
retracement was established, thus down trend continues.
There’s a few things we need to qualify before we can become
confident that a trend change has occurred:
If in a down trend, was support gained? If in an up trend, was
support lost? Are you near the top or bottom of a higher time frame
primary trend? Has the high been lost, or has the low been gained?
Do you recognize significant momentum erosionaccumulation/distribution? Was the leg start of the primary trend
tested?
Look at the chart below and attempt to answer the qualifier questions
above. As price progression takes place, I compartmentalize trend or
leg segments to better understand and simplify the progression. In
order for a reversal to occur, the basic components of trend must be
invalidated. That’s why I pose the qualifier questions. Let’s attempt to
answer them.
Use the chart above for reference, and focus on the blue leg segment
down. Notice that it’s actually an intermediate trend within the primary
downtrend. Notice the retracement that occurred from points (A) to
(B). The retracement produced the move to the low (highlighted in
pink). At the time, I wouldn’t know for certain that this was the low,
but I could be reasonably sure, had I answered some of the
questions:
Are you near the top or bottom of a higher time frame primary trend?
Was the leg start of the primary trend tested?
Let’s see. By zooming out and evaluating the primary trend up, I find
the leg start. Was it tested? Yes. Am I near the bottom of a primary
trend? Yes.
In previous lessons I’ve noted that levels of support should be gained
if a down trend is to continue, just as levels of support should not be
lost if an uptrend is to continue.
Has the high been lost, or has the low been gained?
If in a down trend, was support gained? If in an up trend, was
support lost?
In this example, two important things happened concerning levels
here. The low was gained, because price managed to get above point
(B). Point (B) was the start of the move to the low. If you’ve forgotten
about the gaining the low concept, revert to and read the previous
lesson on gaining the low. If a low is gained, it’s also a level being
gained… If a down trend is to continue, it should not be gaining levels
of support.
Do you recognize significant momentum erosionaccumulation/distribution?
What do you think?
So far, all of the qualifying questions have been answered to
determine that a reversal may be occurring. We need to take it a step
further. All throughout this course I’ve mentioned that it’s extremely
important to utilize all of your time frames. Why would I want to pay
attention to other time frames when attempting to identify reversals?
Common sense. Reversals indicate a change in trend. Where is trend
most significant? Logically, the higher time frames are more
significant, thus higher time frame trends are more significant.
Has the higher time frame trend changed yet? Has the leg segment
swing high that produced the swing low been gained? Nope. I
purposely chose this example because it hasn’t happened yet, and I
want you to grasp the concept. Will this segment get gained and
signal a trend reversal? I don’t know. I don’t need to guess. Until it is
gained, I’d be suspicious, but the beautiful thing is that I can wait until
it happens and trade accordingly. No need to try and speculate or try
to pick the bottom. By using logic, I can deduce whether or not a
trend will reverse or if it’s just a temporary retracement.
Unit 7/9 Volume Climax
Volume is a concept that doesn’t need explanation if you have any
common sense, but they say, “common sense isn’t that common.”
Volume: the number of trades in a security over a period of time. On a
chart, volume is usually represented as a histogram (vertical bars)
below the price chart.
Many traders use some form of volume analysis in their trading
strategy; however many get it wrong. You may recall in previous
lessons, I explained that each candlestick is a representation of
volume (trades made) within a certain period of time. Thus, a single
daily candle would represent all of the trades made within that day.
Completely simple and logical so far. Before we dive in, I want to
mention the concept of liquidity, because it’s directly related to
volume.
Liquidity: The ease with which a stock may be bought or sold in
volume on the marketplace without causing dramatic price
fluctuations. A highly liquid stock is characterized by a large volume
of trading and a large pool of interested buyers and sellers.
In other words, how fluid is the product being traded? Is it easy to
get orders filled, or does it take a long time? Less liquid instruments
will take much longer to fill limit orders and their bid/ask spreads will
be much larger. By this logic, it also suggest that an instrument can
decrease in price due to a lack of liquidity. In many instances, prices
do actually fall due to a lack of liquidity, not due to a lack of sellers. If
you pulled up an order-book you could actually see the lack of orders
at corresponding prices. You can best visualize this right before
significant news announcements from the FED or other central
banks. We call it the “jitters”, because price begins to “jitter” on the
depth of market just before and during significant announcements.
This happens because traders, pull their orders or stop trading to
mitigate risk from the news. Institutional traders, who provide large
amounts of liquidity are then able to place orders and cause
significant pricing “jitters” due to a lack of selling order liquidity.
How does liquidity apply to chart reading? Is it possible to identify
liquidity?
To apply the concepts of liquidity to our chart reading, we have to use
some basic logic and common sense.
Price/Volume Relationship
The relationship between price and volume is correlated. If the
relationship remains symmetrical, both will move forward and
progress together; however if one of the two displays an
asymmetrical relationship in the recent past, it signifies a change.
This change generally represents either an imbalance of volume or
liquidity. A significant change in volume/liquidty is known as climatic
volume. Even experienced traders often have difficulty with this
concept.
Climactic volume is a result of the imbalances of volume and liquidity,
and often creates an inflection point within the instrument’s trend.
Typically, traders use a 20 period moving average overlaid on their
volume charts, illustrated below. Volume is typically described as
climactic when it deviates above the average by more than double.
Notice in the chart below, the highlighted boxes illustrate an inflection
point in short term trend, while demonstrating a significant increase in
volume that is at least double the average.
Like every other concept you’ve learn thus far, volume analysis can
be applied to every time frame, where higher time frames are more
significant. In the chart below, the daily inflection points are even
more clear than the above 4 hour chart…higher time frame
significance.
To understand the cause for volume/liquidity imbalances, we have to
apply some logic. We should be able to apply all of the concepts
we’ve learned to gain deeper understanding. I’ve mentioned the
process of accumulation/distribution, levels, and trend all throughout
this course. The reason is because they all work together. Volume is
no different. Experienced traders often confuse the bearish and
bullish volume bars on their charts. It’s not uncommon to see an
experienced trader suggest that a large spike in volume is bearish
because it correlates to a red price candle.
“Climactic trading volume is the result of a final push of traders
committing to one final wave of buying or selling to continue a stock’s
trend. This type of trading activity is the result of fear or greed
manifesting itself”
-Futures Magazine, Barry Williams 2011.
I don’t know anything about Mr. Williams, but my assumption is that
he is an experienced trader if he’s writing for Futures Magazine. Why
is he writing about fear and greed, emotions that are difficult to
quantify? He sounds a lot like those parroting fake guru (furu)
trading teachers, primarily focusing on the emotional side of trading
rather than logical chart analysis, but I digress.
Applying Mr. William’s logic to the chart below, he would likely
suggest that the large volume spike, highlighted in blue, is bearish
because the candle was red. In other words, traders were selling out
of fear. How does this make any sense? At first glance, it sounds
logical, but you’ll see why it’s not.
Remember, I said climactic volume occurs due to a significant
imbalance of volume/liquidity. In this example, price did move down,
and volume was climactic, but what caused the pop from support?
Logically, that level of support had to contain lots of buying liquidity,
otherwise price wouldn’t have bounced so significantly.
You have to understand that the color of the volume candle makes no
representation of volume bias. It’s colored the same as the candle,
because that’s what it’s programmed to do within your charting
software. Most charting platforms will allow you to color volume any
way you wish. In the chart below, I colored the volume candles
green. Does that mean all of the volume was bullish? Obviously not.
In the chart below, we can apply the concepts learned thus far to
logically analyze the progression of price, as opposed to reverting to
an appeal to emotion as the cause of price movement. If we
understand the process of accumulation or distribution we know that
momentum must be offset before a reversal/retracement can occur.
We know that patterns form as a result of either accumulation or
distribution. We know that the first test rule generally creates a
repulsion from a level. If we know the location of a level, where
should we first see accumulation occur, and what will happen at the
first test of that level? Accumulation first occurs on the smaller time
frames of course. Above we charted on a 4 hour chart. Here we’ve
switched to a 30 minute chart to see if accumulation had occurred.
We can clearly see that a Daily level of support was formed from
much earlier and price was approaching the level. We see a falling
wedge forming and beginning to form a base. We also see a MACD
diverging from price, and then we see the climactic volume. The 4
hour chart above illustrated the candle as red, and Mr. Williams
suggested red candles equal bearish volume, but what does
accumulation imply? Accumulation implies bearish volume is being
offset.
How does bearish volume get offset? Buyers…bullish volume. The
candle that produced the low of around 10750, resulted in a first test,
and opened around a price of 11700.
That’s a 1000 point drop in 30 minutes. People must have been
selling out of fear, right?
Well, where did the buyers come from. The 4 hour candle was red,
so it must have been bearish selling? Enough with the colors…does
that daily support level not mean anything to you?
Accumulation: The act of buying more shares of a security without
causing the price to increase significantly. After a decline, a stock
may start to base and trade sideways for an extended period. While
this base builds, well-informed traders and investors may seek to
establish or increase existing long positions.
They were buying all the way down, offsetting bearish momentum…
the reason that the MACD indicator diverged. Logic is mind-blowing
sometimes.
So how can we utilize climactic volume? Volume was just one piece
of the puzzle. If you understand how to deconstruct trend and
momentum, volume becomes rather unnecessary, because it’s
implied. If you like having volume on your chart, there’s nothing
wrong with using it, as long as you understand what it represents.
Climactic volume can help you find inflection points: retracements
and reversals.
Unit 8/9 False Breaks, Fake
Outs, & Traps
I often hear traders talk about entering trades only to have price move
against their position, stop them out, and then reverse back to their
intended direction. Usually the next words heard are something
about how price falsey broke out or faked them out with a bull or bear
trap. Ah, the intellectual meanderings of a typical break out trader.
When you hear this type of talk, does it sound logical? Are people or
machines really trying to fake you out? What if we could analyze
these movements from a technical perspective?
The false breakout/fakeout mentality runs rampant within trading
communities. Perform a Google search on ‘false breakouts’ and
check out the returned search. Page after page of people offering to
teach you how to avoid false breakouts. If so many people claim to
teach this strategy, then it must be a real concept right? This lesson
will attempt to show you the perspective of an ill-informed trader
versus the perspective of the informed.
In the chart below, I’ve highlighted a typical ‘false breakdown’
scenario. Price seemingly begins to move below support, only to
bounce higher, likely stopping out traders that had attempted to short
the breakdown. At first glance, itt seems that the internet wizkid
traders may be onto something here, right?
What’s actually happening?
To really understand why price ‘falsey broke down’, we must zoom in
and look more closely. It’s probably fairly obvious to you now that I’ve
pointed it out, but price dropped down to a different level of support
due to the level being tested. Because that level of support was
untested, price bounced. Nothing complicated here, but somehow it
falsely broke down…
These traders really must not understand how support and resistance
work, because if they did, would they really be blaming that they got
faked out?
While we’re on the subject of nonsense, this is a good opportunity to
bring up bull and bear traps. Some traders consider bull/bear traps a
violation of a key level only to reverse against breakout/down
traders. The logic used suggests that smarter traders are attempting
to lure in weaker traders. The breakout traders has their orders filled,
and shortly after price randomly reverses against them. The problem
with this line of thinking is that, while on the surface it sounds
reasonable, but it does not provide a quantifiable argument as to
what is actually taking place.
The chart below illustrates what some traders might call a “bear
trap.” Notice how price attempts to break lower, only to seemingly
hold support and reverse. All the breakdown traders got short and
got trapped. Did they get trapped due to smarter traders attempting
to fake them out or lure them into a position?
Unlikely. What’s more probable is that those weaker traders lack the
ability to properly identify support and resistance, or more importantly,
properly read a chart.
Notice in the chart below, I included the level that price bounced from
at first test. Most of the breakout/down traders failed to see the level
at 1.2255 where price bounced, therefore, they became victims of the
everpresent “bear traps” lurking around every corner. Maybe those
traders just can’t properly read the chart. It’s mind boggling to think
about all the fake trading gurus peddling the fakeouts and trap trading
strategies.
The two charts below provide an example of a “bear trap” in
consolidation. Read that again…how much more vague and ill witted
can we get in our analysis?
The problem here is the trader didn’t zoom out enough in their chart
to find proper untested levels. The chart below should appear clear
to you as to why price bounced at first test.
Bull traps are no different than bear traps. Both are equally illogical.
Remember the concept you learned about losing the high? The so
called bull trap below just went to test the significant level from where
price first started to produce a swing high (highlighted in purple).
Scroll back up and look at every single chart. Notice how price is
always going to test a significant level during these so called fake
outs or traps? I wonder why that happens?
Unit 9/9 Trend Continuation
Dips are technically possible and still be in an uptrend…but this is the
definition of trend. The logic speaks for itself. The weekly level has
not been lost. Thus, uptrend is still valid.
It’s important to understand this concept, because many times on a
second test, the level will hold. Momentum hasn’t been offset
enough, and trend continues. Recognizing this will help you make
safer trades.
Module 4 Market Psychology &
Risk
Unit 1/4 Forming A Bias
The more you research for trading methods, strategies, and trading
gurus, the more you realize how little most of them actually know
about chart reading. A common theme within the trading community
lies within the psychological realms. Some of the psychological ideas
are more logical than others, which makes them more useful, while
other nonsensical ideas are not so useful. The main issue with
psychological trading concepts is that they are more difficult to
quantify because their in your head. If something is in your head, it’s
less likely to actually be a reality. For example, people make excuses
for everything in their lives. Excuses are almost always made to
thwart a negative result or an unwanted feeling. Sometimes excuses
are legitimately made. Sometimes things happen in life that are
completely out of your control. In trading, you should have nearly
complete control. Aside from power and internet outages, the trader
should have complete control over his/her decision making and trade
executions.
Emotion is another topic I often hear traders talk about. If you’ve ever
studied logic, you know… the concept largely accredited by Aristotle,
then you know logic and emotion are not usually friends. When a
person uses logic, an action takes place, and a reaction typically
follows. The result is logical. Math is logical. If X, then Y is a
completely logical statement.
What happens when you insert feelings and emotion? I feel like X, so
then I think Y. Feelings are subjective and not easily quantifiable.
Inserting a feeling into the equation has the potential to drastically
influence the outcome of the assertion. Who knows what you’re
feeling was based on? Was it a logical assertion or an emotional
assertion? I’m taking a moment to explain because it’s leading us
somewhere… feelings and emotions produce something in trading
that is often extremely detrimental to your account balance. That
detriment is what we call bias.
Bias: cause to feel or show inclination or prejudice for or against
someone or something.
Generally, when a trade forms a bias towards a trading idea, rather
the idea be logical or not, it makes the trade rigid and more unwilling
to exit a losing trade. As a trader, your idea might be sound;
however you might have overlooked a significant level on an adjacent
time frame that caused a rejection in price. If you haven’t conformed
to a bias, you may take a moment to find the error and adjust your
trade accordingly. The trader that forms a bias, will often sit in a bad
trade because they have a feeling, or an emotion has come over
them, preventing logical thinking.
How can I overcome biased thinking? The easiest way is to realize
that you cannot be right all of the time. Learning the concepts in this
course, until mastery, will help you alleviate much bias, emotion, and
indecision. At some point, trading should become rather boring for
you. If you’ve ever traded futures, stocks, or forex, you may have
noticed that upon entering a trade, you always start out negative.
This is because market makers create a spread for the product being
traded. You will never get the best fill possible when entering and
exiting a position. You will always enter a trade a loser initially.
Losses are built in…they’re part of the game.
Overconfidence: the quality of being too confident; excessive
confidence.
The ability to make good decisions requires both a basic knowledge
of subjects and understanding our knowledge limitations. Not
admitting to and exploring what we don’t know leaves the door open
for overconfidence, often leading to sub-optimal trading decisions.
An Exercise in Overconfidence/Bias
New traders have tendency to overestimate their knowledge.
Researchers, conducted a study on how overconfidence contributed
to habitual problems, and created a test to further gauge the effects
of overconfidence and it’s limitations. The participants were asked
questions to gauge their level of certainty of concepts within their
respective fields. The results showed that most people answered
questions incorrectly where they held a high degree of certainty.
This finding suggests that even though you think you are
knowledgeable about trading and chart reading, you are going to
make mistakes in judgement. The only thing that matters in trading is
your profit/loss. Your bias doesn’t matter. Your trade idea doesn’t
matter. Your return on investment doesn’t matter. Your success rate
doesn’t matter. Sounds hard to believe I know, but the reason none
of that matters is because in the one instance you are wrong, has the
propensity to completely wipe out your trading account. 99 out of 100
trades could be profitable, but what do you do with the one losing
trade determines your trading longevity. If you’re prone to bias or
have an ego issue, that one trade will decimate your account. Bias
kills…that’s a certainty.
Unit 2/4 Common Mistakes
& Bad Habits
I’ve compiled a list of common mistakes and bad habits that traders
tend to make.
Recognizing your flawed behavior and thinking processes will only
serve to improve your trading. If you are guilty of any of these
mistakes, figure out why, and fix it quickly.
Going long at resistance and short at support.
Failing to learn the most basic functions of chart reading is a
guaranteed means of making your account balance smaller. Believe
it or not, many ‘experienced’ traders still make this mistake.
Are you prepared?
Did you review your charts before you entered the first trade of the
day? Can you build a house without first drawing up the blueprints?
Maybe, but it’s going to be a more disorganized project.
Post trade analysis.
Analyze your trades after your session is over. If you made a bad
trade, find out the technical reasoning.
Hindsight trading.
New traders often watch a trade after the’ve exited and get upset
after taking profits too quickly. Rarely do you hear them complain
about taking a loss to quickly. Funny how that works.
Do you understand the difference between long and short term
perspectives? Ever see traders looking to take a scalp that turns into
a swing trade or vice versa? Whatever the length of position, analyze
the appropriate charts that correspond with your trading idea and
length of position
Understanding Risk and Managing it.
Risk is measured as potential loss of your trading account. Set the
stop distance in relation to the take profit distance and the trade size
to get an idea of potential risk.
Blaming HFT and algorithmic trading for your inability to make
money. HFT and algorithms are not the reason why you cannot make
money. Sounds like you better learn to read a chart.
You use the words casino, boring, firework, killing it to describe
your trading day. Markets go up and they go down, sometimes they
move fast and sometimes a little bit slower, but it is the nature of how
financial markets behave. However, if you are trading because of a
thrill and excitement, you won’t last long in this business. Adopt a
professional mindset and use appropriate language to avoid
emotional trading.
Over-leveraging and trading too big.
We’re not in a poker tournament. There’s no reason to risk the
majority of your account on any single trade. If the account goes to
zero, you’re done.
Watching floating P&L.
While in a trade, don’t focus on your account movement with every
tick. Instead, watch your chart. The chart never lies.
Trading too big.
If the trading outcome makes you nervous, you’re probably trading
with too much size. The trade should be small enough to where you,
maintain an indifferent mindset.
Adding to losing positions.
Take losses because they are unavoidable.
Risking an arbitrary number % on each trade.
Not all trades are equal. A trend start trade will yield much more
profit than a tiny scalp. Which one deserves a larger position size?
Holding losers while selling winners.
The disposition effect states that on average, traders sell winning
trades 50% faster than they hold losing traders.
Is your trading account size appropriate?
Trading with a tiny account size will affect your mindset when trading.
You will likely make bad decisions based on the account size,
because it’s more exposed to being blown out when it’s smaller.
Widening your stop loss in a losing trade.
A stop loss is place near the point of invalidation that proves your
idea is likely wrong. If you’re moving
Using mental stops but not actually cutting losers.
A mental stop is fine if you can actually let go of your ego enough to
admit your idea was wrong, and to stop yourself out of a loser.
Incorrectly placing stops.
You aren’t being manipulated by the aglos. They aren’t hunting your
stops per-se. More than likely you are getting stopped out because
you don’t understand where a trade is technically invalidated.
Not cutting invalidated trades.
If the trade invalidates trend or a significant level, you’re idea was
likely wrong. Cut the trade and move on…NEXT…
Expecting to get rich quickly.
The truth is most traders never become profitable. They never learn
why they’re unprofitable and never address those flaws prohibiting
them. Trading is about making consistent winning trades over and
over again. Overleveraging for the one big trade you’ve been waiting
on can work, and may be even acceptable in certain circumstances,
but in almost every scenario, you will never get rich in a single trade.
Trading is a business.
If you aren’t trying to improve your business, you have no discipline
and probably don’t care about your own self-growth. If you work a 95 type job, your employer holds you to a certain expected standard.
You actively chose to adhere to those standards. Trading is no
different, except you are your own employer.
It can’t go any higher or lower than $XYZ
Chances are you’re reading a momentum indicator that is telling you
a reversal is due, but you don’t know where or why. There are
technical reasons that price generally cannot violate. For example,
price rarely does not get rejected on a first test of an untested level.
Keyword… almost…
Unit 3/4 Position Scaling &
Campaigning
Managing risk is of paramount importance in the trading game.
Managing risk provides you with trading longevity. Trading is a longrun endeavor. Short-term variance is natural; however over the longterm, your ability to manage risk is what will generate long term profit
consistency. Anyone that says otherwise, is lying to you.
Regardless of how well you execute the teachings within this course,
if you fail to manage risk, you will ultimately remain a losing,
unprofitable trader. For example, pretend you enter 100 trades,
where 99 are winning trades and one trade results in a loss. No
matter how much profit generated from those 99 winning trades, if the
single losing trade has the ability to completely wipe out your
account, and is not managed, then assume that it will blow out the
account. What is the point of trading if you cannot manage the
losing trades that have the potential to destroy your account
balance? Why not find something better to do with your time.
I’m assuming that you purchased this course because you actually
care about your results. I want to introduce the idea of position
scaling, a technique that allows you to add or subtract risk to a
position, while simultaneously locking in profits and minimizing
losses.
Position scaling, sometimes referred to as campaigning is the idea of
scalping, leveraging/deleveraging risk throughout a trade while
maintaining the position. The idea implies that you may hold a
longer-term outlook on a particular trade. In the example below,
assume you held a short position, betting that the EURUSD would
decline. For simplicity sake, let’s assume you entered short with 100
contracts at a first test of support lost. Perhaps you believe EURUSD
will continue to decline, but because you have multiple contracts, you
realize the need to manage risk, thus you establish multiple potential
target areas to take profits. The percentage you decide to scale is
arbitrary and completely up to you. Many traders utilize simple
percentages like 25%, 50% and 75% of the total position to
deleverage etc. In the example below, I’ve chosen the 50% scaling.
The chart theoretically depicts the idea of scaling out of half of a
position at or near potential areas of support and then scaling back
into the full position at areas of perceived resistance (support lost).
If the above chart seemed too complicated, the chart below might
provide further context to the illustration. Below, the chart of crude
oil offers a potential swing trade, where you could enter a long at
accumulation and scale down half the position at a perceived
retracement. This scaling would lock in profits, deleverage the
position to minimize drawdown during the retracement, and allow you
to rescale the position back to 100% size for the perceived bounce
after the retracement. This method of trading simply allows the trader
to stay in positions longer, where the alternative is to simply just
completely exit a trade. Neither method is more correct than the
other, as both methods offer pros and cons. Completely exiting a
position offers the positive aspect of completely mitigating position
risk; however the drawback exists around the idea that the trader
may not recognize the larger move that would generate larger returns
in the long run, ultimately missing out on the larger move. This is the
opportunity cost present when exiting a trade.
Opportunity Cost: refers to a benefit that a person could have
received, but gave up, to take another course of action. Stated
differently, an opportunity cost represents an alternative given up
when a decision is made. This cost is, therefore, most relevant for
two mutually exclusive events. In investing, it is the difference in
return between a chosen investment and one that is necessarily
passed up. (Source: Investopedia.com)
By scaling, the trader leaves a portion of the position to run, which
ultimately could capture a larger move, generating more profit than
having no position. The downside to scaling is, if you’re in a position,
you are exposed to drawdown. It’s common sense, but important to
remember: taking a position allows exposes you to risk. Your
analysis could be wrong, and you could experience a loss. By
scaling, you effectively minimize the potential loss, while allowing the
position a chance to generate greater profits. Obviously, if your your
analysis is good, the likelihood of success increases.
If you find yourself struggling to stay in trades longer because you
lack confidence, scaling may help you. Perhaps you find yourself
generating good analysis, but you take profits took quickly. I think it’s
generally a bad habit to fret over missing potential profits, because it
has the propensity to reinforce unclear thinking; however, there’s
nothing wrong with critically analyzing your trading to find holes or
leaks that will help you generate higher returns later. Scaling is an
option for you and is how many successful traders build confidence
and consistency in their trading.
I think you should be able to figure out how to scale in and out of this
setup in crude oil.
Unit 4/4 Ego & Pain Trading
Deny yourself the self-absorption. Deny the ego. Kill it, because it is
the reason why you will remain unsuccessful. You are not trading to
be right; you’re trading to hear the ringing cash register. That sound
should be one of the most sacred sounds you hear. Chaaaaaaching….