My "potential NQ targets" thread is of course about potential NQ targets, exclusive of any particular method or approach, apart from the reliance on trend. This journal will illustrate one particular approach that can be applied to exploit those targets: the Straight Line Approach (SLA). There have been four previous journals illustrating this approach and explaining how to apply it, but every time there's a software upgrade, some of the charts get lost. By now those journals look like swiss cheese. Therefore, this thread is a fresh start. Those who want to visit the previous journals and skip all the discussions of charts that are no longer there may find useful information in the discussions that are not tied to particular charts. Those who instead want to consider this as "Go!" are welcome to do so, but you won't be getting $200. I've always taken the deductive approach to explaining this, and those who prefer to study principles which may then be applied are welcome to study the abovementioned journals and the SLA pdf linked above. Those who (a) prefer the inductive approach and/or (b) would rather not slog through several thousand posts may find contentment and even happiness with what will be posted here. Either way, what is essential is an understanding of the Law of Demand and Supply and how it manifests itself in price movement. Without that understanding, subsequent posts will make little if any sense. I had been in Wall Street 20 years when I discovered that it was possible to judge the future course of the market by its own action. In my book, Wall Street Ventures and Adventures through Forty Years, I stated my experience and observations in 1909 as follows: I saw more and more that the action of stocks reflected the plans and purposes of those who dominated them. I began to see possibilities of judging from the very tape what these master minds were doing. My editorial work was proving a most valuable means of self-education. In gathering material that would benefit my readers, 1 was actively searching out the stuff that would aid me personally. While my subscribers were given the best of what I collected, there was much in material discarded which helped to build up what I might call a code of enlightened procedure for use in this greatest of all the world’s games. I had a friend who had been a member of the Exchange and who was well up on the technique of the market from the standpoint of the floor trader. We often discussed the difference between reading the tape simply to follow price changes (as most clients did) and reading the tape in order to judge the probable action of stocks in the immediate future. Starting from the simple ground that the logical action of a stock was to decline when offerings exceeded the number of shares bid for, and to advance when the amount bid for was greater than the amount offered, we agreed that the quantity or volume of stock changing hands in each succeeding transaction was of great importance. Anyone who undertook to read the minds of the momentary buyers and sellers was able to measure, to a certain degree, their eagerness or anxiety to buy or sell; also to measure the force of the buying power or selling power as shown by the number of shares; and to judge of the purpose behind the action, whether it was to buy without advancing the price, or to force the price up, or to mark it down, or to discourage buying or selling by others, as the case might be. Each transaction carried with it certain evidence, although it was not always possible to interpret that evidence. All stocks no matter by whom they were owned, bought or sold, looked alike on the tape. But the purposes behind this buying and this selling were different and these might be fairly clear to those who understood market psychology. Each transaction, although recorded only once, represented a meeting of minds; those of a buyer and a seller. This meeting of minds took place at a certain post on the floor of the Stock Exchange, even though the buyer might be in the far west and the seller in Europe. Not all transactions were significant, but the interpreter must detect those which were. He must see that some indicated a purpose. Some one or some group was carrying, or attempting to carry, something through. He must take advantage of that. Continuing my studies of the tape, I realized that the Basic Law of Supply and Demand governed all price changes; that the best indicator of the future course of the market was the relation of supply to demand. The Law of Supply and Demand operates in all markets in every part of the world. When demand exceeds supply, prices rise, and when supply is greater than demand, prices decline. This is true not only of stocks; it is constantly being demonstrated in markets for wheat, corn, cotton, sugar and every other commodity that is bought and sold; also, it is reflected in other markets such as real estate, labor, etc. I demonstrated this further in a series of articles entitled: “Studies in Tape Reading” which attracted wide attention as the first of their kind ever published anywhere, as far as I knew. My basic idea in this series was that the stock market, by its own action, continually indicates the probable direction of its immediate and future trend, and anyone able to determine this with accuracy should attain success in trading and investing. Coming events, I claimed, were foreshadowed on the tape because large interests there disclosed their anticipation of advances or declines by their purchases or sales. So, too, with the large speculator who was endeavoring to raise or depress prices. If one were to become sufficiently expert, he could judge by the action of stocks what was in the minds of these large interests and follow them. The trend was simply the line of least resistance. When a stock met opposition in its rise, it must either be strong enough to overcome this resistance (selling) or it must inevitably turn downward, and when, in its downward course, sufficient buying was encountered to halt the decline, it would turn upward. The critical moments in all these various phases of the market were these minor and major turning points, or else the points where the price broke through the opposition into a new field. Further development of this method of judging the market from its own action resulted in my using it as a basis for predicting the probable course of the market, and this eventually led to my issuing weekly, “The Trend Letter” (first published in 1911) which had a most successful career for many years. In fact, the forecasts contained in this Letter were so accurate that a large following was developed. As a result of a series of successful campaigns we were not only overwhelmed with business but brokerage houses throughout the country passed along these recommendations to their clients. So many followers were gained that an undue effect was had on the quotations for the stocks in which they traded, and in certain cases the effect on the market was important. My reason for mentioning these facts is to show that this method of judging the market by its own action was highly successful from the standpoint of profits realized for subscribers who followed my advices, as well as for many thousands of people who were not subscribers but who bought and sold when we did. From the above you may judge how vital it is in the stock market, as in every field, to operate with the proper principles. Richard Wyckoff
Since we had recently been testing the upper limit of this channel, the failure on Friday to break through it presented not only an opportunity to trade at an extreme but also to trade a failure to break through it. The panic which so often accompanies these failures was a helper. Therefore, I've elected to begin this with the good example that Friday provides. It all starts with context:
Rarely do any of us grow up learning how to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way. In the trading environment, you will have to make up your own rules and then have the discipline to abide by them. The problem is, price movement is fluid, always in motion, quite unlike the highly structured events that most of us are accustomed to. In the market environment, the decisions that confront you are as endless as the price movements you intend to take advantage of. You don't just have to decide to participate, you also have to decide when to enter, how long to stay in, and under what conditions to get out. There is no beginning, middle, or end -- only what you create in your own mind. Mark Douglas
Hi DB, Thanks for starting another SLA thread. I've been trying to piece together the prior threads the best I can but with so many of the images missing it's tough. I did study the PDF and have a basic idea of the method. My understanding is that when price broke the down trendline, the trader would try to assess how much the balance had shifted from supply to demand. It traded up pretty aggressively from the low indicating strength, but once it got above the down trendline, it formed a small range making one question whether the balance had really shifted that much. I don't see an exit mark so I am assuming you weren't short during the down trend. Even though price sold off after the trendline break and seemed to be continuing the down trend, price made a slightly higher low and so you went long on that basis. My quesion is, when you saw that price didn't take out the swing high made at approx 1400, then broke your demand line, and then formed a double top, would it be reasonable to enter short right after the double top? Thanks
The short is shown in red, the first retracement after price has dropped below the opening range, though one could also short earlier depending on his risk tolerance. The lines are reference points. They are not critically important in and of themselves. If a line is broken, the trader shouldn't panic but rather think about why price moved as it did and whether or not it's relevant to his goals. Price is going to retrace its progress, whether up or down. If a trader is going to trade trend, he's going to have to accept this since the strength of the retracement is far more important than the retracement itself. If it is unable to retrace 50%, one can assume that price will continue in the original direction, or at the very least move sideways until traders decide what they want to do. As for the late afternoon trade, that's up to the trader. If he's still around and wants to trade so near to the NY close, why not? OTOH, he may have a longer-term view and want to stay in the short he was in to begin with. Or he may be uncomfortable with staying in while the market is closed for two days, in which case exiting entirely and re-evaluating Sunday night may be more prudent. The tactics one employs will depend on his understanding of trend and of the balance between demand and supply. One might decide that if price can't rally past 60, he may as well stay in the short he took at the open. Needless to say, this is not mechanical, but there are decisions that one must make if he is going to be successful with it.
Good point about being so close to the end of the session. I meant to add "ignoring the time of day and just looking at the price action". I'm old and getting forgetful these days! One other thing I've always wondered about. You often remind us how price is continuous and that any particular bar interval is self-imposed and arbitrary, rendering the "close" of each bar meaningless. I agree completely and have always been fascinated by the amount of importance people place on "where a bar closed." On the other hand, in chapter 7 of Wyckoff's course where he analyzes, bar by bar, several months of price action on a daily chart, he refers to where particular bars close quite a bit. Is this seeming contradiction because, back then, the market didn't trade 24 hours and the daily close was a lot more significant than it is now?
Hi DB so , is it justified to take the short right into a potential sup. level ? if so why ? i mean we have penetrated that level before but allways came back.. ie ( the dog that didnt bark. also a supplylne was broken so one couldhave placed a buy stop right above the bar u have shortet .. but why take the risk to short into such a level ? of pot. support ? couls u please elobortate your thoughts while taking the trade ? thnx
Back then, there was a literal close, and that close represented an agreement between buyers and sellers as to value, at least at that moment. Price may not have been "continuous" from day to day, but if one backs out of a daily or weekly view, he will see that price action looks much like a snake, as opposed to a shotgun blast. One may think instead of the "close" as a pause. We have those today, interday and intraday, when price moves sideways for a time, the level being that which buyers and sellers have determined to be value. This may last for a few minutes or for several days. Knowing that everyone is at least temporarily on the same page enables the trader to make plans for the eventual move away from this pause.
If by "potential support level" you mean 4277, that's up to the trader. If he'd rather wait to clear all that before entering, that's his choice. This isn't about taking trades but illustrating principles. There are many places to enter and exit depending on the bar interval used and on one's risk tolerance. What matters here is the failure to make a higher high at the open and the drop through the pre-market range, i.e., what traders at the time decided was value. Where exactly one shorts isn't particularly important, though if one waits for multiple confirmations, the move may be nearly over by the time he decides to take advantage of it.
ah , ok , we formed lets say a double top.. ie failed new high.. traded back into a pre-market range and failed to advance from there.... even thou .. shorting the low of the 1 min bar somewhat is risky... (only if one cant see how it develpoed thus far and from then on in realtime) but then again if one cant take the risk he should better stay out.. or he actually didnt see whats going on within price.. which points out a problem showing only snap shots of price(charts). instead of actuall price movements in realtime or videos.... which is actually the main source one should trade of... (not snap shots) so.. if one follows price in real time he may see things one who only focuses on bar intervals doesent see.. !?! thnx DB ..